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May Hedge Fund Review

Managed futures finally returned to their winning ways.

Terry Tian, 06/21/2012

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, was down 0.5% in May, but still up 2.7% for the first five months of the year. May proved to be a challenging month for most hedge fund strategies as the European sovereign debt crisis once again dominated market sentiment, while managed futures was one of the few strategies to shelter investors from the market downturn.

The U.S. stock market suffered the biggest decline since last September—the S&P 500 Index and the Russell 2000 Index dropped 6.0% and 6.6% in May, respectively. European and emerging markets stocks declined sharply—the MSCI Europe NR USD and the MSCI EM NR USD indexes plummeted 12.3% and 11.2%, respectively, in May. In light of this broad market downturn, equity-based hedge funds strategies were some of the hardest hit--the Morningstar MSCI Equity Hedge Fund Index fell 3.8% in May. International-focused hedge funds also posted heavy losses--the Morningstar MSCI Europe Hedge Fund Index and the Morningstar MSCI Emerging Markets Hedge Fund Index dropped 1.8% and 5.7%, respectively.

Arbitrage strategies held up better, in part because the volume of mergers and acquisitions worldwide continued to improve despite worsening global macroeconomic conditions. The Morningstar MSCI Arbitrage Hedge Fund Index and the Morningstar MSCI Relative Value Hedge Fund Index declined only 0.2% and 0.3% in May, respectively.

Managed futures strategies finally returned to their winning ways, as major commodities, such as crude oil and copper, exhibited consistent declining trends in May. The Morningstar MSCI Systematic Trading Hedge Fund Index jumped 2.1% in May, its largest gain since July 2011, making it one of best-performing hedge fund indexes for the month.

Other winners were currency-focused hedge funds—the Morningstar MSCI Currencies Hedge Fund Index rose 2.0% in May. Currency hedge funds managed to benefit from the sharp depreciation of European and major emerging market currencies against the U.S. Dollar.

In April, single-manager hedge funds in Morningstar's Hedge Fund Database leaked $4.1 billion, while funds of hedge funds gathered $402 million. The systematic futures category experienced the heaviest redemptions among all single-manager categories, bleeding $3.8 billion. The global macro and diversified arbitrage categories received inflows of $859 million and $529 million, respectively.

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Terry Tian is an alternative investments analyst at Morningstar.
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