Hedge funds benefited from September’s stock and bond market rally.
Favorable macroeconomic data, a tentative compromise with Syria, and the postponement of tapering by the U.S. Federal Reserve allowed hedge funds to advance above and beyond August’s declines. The Morningstar MSCI Composite AW Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.6% in September, along with global stock and bond markets. The MSCI World NR global stock index climbed 5.0%, and the Barclays Global Aggregate TR bond index rose 2.1% in September. The Morningstar MSCI Composite AW Hedge Fund Index has increased 5.0% for the year through September.
Long-biased equity strategies profited the most from the Federal Reserve’s decision. The Morningstar MSCI North America Hedge Fund Index increased 2.0% for the month, and 4.1% for the third quarter of 2013, as the S&P 500 reached all-time highs. Similarly, the Morningstar MSCI Small Cap Hedge Fund Index, which represents small-cap long-short equity strategies, rose 3.5% in September, while the Russell 2000 Index spiked 6.4%. The Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index have risen 8.9% and 15.0%, respectively, year-to-date through September while the S&P 500 and Russell 2000 Indexes increased 19.8% and 27.7%, respectively.
Bonds also rallied following the mid-month Federal Open Market Committee meeting. The Barclays Global Aggregate Bond Index increased 2.1% in September, and the Morningstar MSCI Fixed Income Hedge Fund Index rose 0.8%. The Morningstar MSCI Fixed Income Hedge Fund Index advanced 2.9% for the year through September, while the unhedged Barclays Global Aggregate Bond Index declined by 2.2% because hedge funds were less exposed to declining interest rates in May and June.
Emerging markets hedge fund strategies rose sharply on surprise GDP growth in countries such as China and Brazil and a globally endorsed Russian plan to remove chemical weapons from Syria. The Morningstar MSCI Emerging Markets Hedge Fund Index advanced 3.2% in September and 1.5% in the third quarter, compared with 6.5% and 5.8%, respectively, for the unhedged MSCI Emerging Markets index.
Unrelated to the broad markets, arbitrage strategies did modestly in September. The Morningstar MSCI Arbitrage Hedge Fund Index rose 0.8%, and 1.6% in the third quarter. Merger arbitrage strategies took profits as several large deals closed at the end of the quarter. Convertible arbitrage strategies benefited from increased issuance across the globe.
The Morningstar MSCI Discretionary Trading Hedge Fund Index, made up of hedge funds that trade macro-economic trends, rose a modest 1.2% in September. The index increased 5.5% for the year through September. On the other hand, systematic futures traders, which typically trade on price momentum, struggled as stocks and bonds reversed course during the month. The Morningstar MSCI Systematic Trading Hedge Fund Index sank 0.8% in September, dragging down its year-to-date decline to 3.9% and extending its two-year record of annualized losses.
The systematic futures and long-only equity categories saw outflows of $424 million and $345 million, respectively, in August. For the year through August, both categories have bled assets. Multistrategy and long/short debt hedge funds experienced significant inflows of $178 million and $273 million, respectively. In aggregate, single-manager hedge funds in Morningstar’s database saw minor net outflows of $26 million in August. Top-performing, 5-star hedge funds with at least a three-year track record raised an additional $386 million in August. $85 million also flowed into funds with no Morningstar rating in August. These newer funds have collected $7.3 billion for the year through August.
September returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of Oct. 23, 2013. August asset flows are based on funds that reported as of Oct. 14, 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.
This release is not intended to be an offer or solicitation for the sale of hedge funds. The information is not warranted to be accurate, complete, or timely. When considering hedge funds, investors should consider various risks, including the fact that some products engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager. The high degree of leverage that is often obtainable in trading can lead to large losses as well as gains. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.