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Morningstar Reports Hedge Fund Performance for August, Asset Flows Through July

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today reported preliminary hedge fund performance for August 2013 as well as estimated asset flows through July. The Morningstar MSCI Composite EW Hedge Fund Index, an equal-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, fell only 0.7% in August, while global stock and bond markets saw more significant declines. The MSCI World NR global stock index sank 2.1% and the Barclays Global Aggregate TR bond index fell 0.5% in August. The Morningstar MSCI Composite EW Hedge Fund Index remains up 4.1% for the year through August.

“In August’s stressed market environment, hedge funds delivered downside protection,” AJ D’Asaro, fund analyst at Morningstar, said. “Most hedge fund strategies fared better than global stock and bond markets, which were impacted by fears of Western intervention in Syria and the anticipated tapering of the U.S. Federal Reserve’s $85 billion monthly bond-buying program.”

Uncertainty drove U.S. markets lower in August, which primarily benefitted short-selling hedge fund strategies. The Morningstar MSCI Short Bias All Size Hedge Fund Index rose 3.3% in August, better than any other Morningstar MSCI Hedge Fund Index. The index is down 14.3% for the year through August, however, near the inverse of the global stock markets’ gains. Long-biased equity long-short strategies failed to make money in August, but they didn’t lose much either. The Morningstar MSCI North America Hedge Fund Index fell only 0.3%, as managers increased their hedges. Similarly, the Morningstar MSCI Small Cap Hedge Fund Index, which represents small-cap long-short equity strategies, dipped only 0.9% as the Russell 2000 Index plunged 3.2%. The Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index have risen 7.0% and11.7%, respectively, for the year through August while the SandP 500 and Russell 2000 Indexes increased 16.2% and 20.0%, respectively.

The best risk-adjusted results in August came from the Morningstar MSCI Statistical Arbitrage Hedge Fund Index, which comprises hedge funds that engage in quantitative, short-term, mean-reversion strategies with large numbers of long and short securities. The Morningstar MSCI Statistical Arbitrage Hedge Fund Index rose 0.6% in August, and is up 12.9% for the year to date. Relative value hedge funds, which trade long and short pairs but follow more fundamental strategies, also inched up 0.1% in August and 3.5% for the year through August.

Weakening fundamentals in Brazil, Russia, and India continued to plague the Morningstar MSCI Emerging Markets Hedge Fund Index, which declined 1.9% in August. Overweight exposures to these economies caused some hedge funds to decline more than the unhedged MSCI Emerging Markets Index, which dropped only 1.7% in August. However, the Morningstar MSCI Emerging Markets Hedge Fund Index has remained flat for the year through August, while the unhedged MSCI Emerging Markets Index has fallen 10.2%.

The Morningstar MSCI Discretionary Trading Hedge Fund Index, made up of hedge funds that trade macro-economic trends, fell a modest 0.3% in August. The index has increased 4.6% for the year through August. The systematic futures traders, however, struggled as markets reversed direction mid-month in response to Federal Reserve tapering fears and Syria worries. The Morningstar MSCI Systematic Trading Hedge Fund Index sank 1.1% in August, dragging its year-to-date fall to 2.8% and extending its two-year record of 5.3% annualized declines.

In July 2013, single-manager hedge funds in Morningstar’s database saw net outflows of $1.4 billion, bringing year-to-date net inflows through July down to a mere $354 million. Multistrategy hedge funds were the only category to experience significant net inflows for the month—about $1 billion. This same category experienced net outflows of $1.4 billion in June. Systematic futures hedge fund strategies saw $849 million of outflows in July. Investors have pulled $4.5 billion from this category for the year to date through July.

Not all hedge funds in Morningstar’s database lost assets, however. Top-performing, 5-star hedge funds with at least a three-year track record raised an additional $300 million in July and $1.5 billion for the year through July. Surprisingly, $493 million also entered funds with no Morningstar rating in July. These newer funds have collected $6.9 billion in inflows for the year through July.

August returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of September 27, 2013. July asset flows are based on funds that reported as of September 13, 2013. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar DirectSM, the company’s global research platform for institutions.

Morningstar has approximately 11,000 hedge funds and funds of hedge funds in its database. Morningstar calculates hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstar’s hedge fund database. These indexes demonstrate the performance of hedge funds to investors who have hedged their currency exposure back into U.S. dollars. The MSCI Hedge Fund Index Methodology classifies hedge funds by investment process, geography, and asset class. These indexes are not investible.