Morningstar: Hedge Funds Have Best Quarter Since ‘03

Jul 22 2009 | 12:55pm ET

Buoyed by their best month in a decade, hedge funds enjoyed their best quarter in at least six years, according to Morningstar.

The Morningstar 1000 Hedge Fund Index soared 9.25% in the second quarter, its best three-month return since the index debuted in 2003. The index ended the first half up 8.93%, shedding 0.2% in June.

“Smaller single-strategy funds went full throttle back into risky assets in May and June,” Chicago-based Morningstar’s Ben Alpert said. “Overall, hedge funds outperformed both the U.S. stock and bond markets for the first half of the year, although they failed to keep pace with most overseas equities markets. Larger funds were more cautious following the difficult 2008 market, and lagged smaller funds.”

Emerging markets funds and U.S. small-cap funds did the best on the quarter, rising 24.93% (25.5% year-to-date) and 19.72% (16.17% YTD), respectively.

Despite the big returns, Morningstar said that investors are still fleeing the industry. The data provider said that hedge funds suffered a $1.4 billion outflow in May, bringing total losses on the year to $53 billion. Funds of hedge funds, by contrast, actually took in new money in May, adding $294.5 million, although the sector has lost $6 billion on the year. Fund of hedge funds returned 5.46% through June.

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