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July Hedge Fund Review

Hedge funds weathered through a volatile July.

Terry Tian, 08/22/2012

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, was up 1.9% in July, bringing the index's year-to-date return to 3.7%. Most hedge funds successfully weathered through a volatile July, beating the broad stock market indexes. Managed futures and currency strategies delivered particularly strong performance. 

Managed futures strategies were some of the biggest winners in July, as the Midwest's worst drought in 25 years resulted in strong and persistent upward trends in major agriculture commodities, such as soybeans, wheat and corn. The Morningstar MSCI Systematic Trading Hedge Fund Index, which includes managed futures funds, jumped 4.3% in July, bringing its year-to-date return to 2.7%.

Currency hedge funds benefited from their short positions on the Euro. Despite a late month rebound, the Euro depreciated substantially against the U.S. dollar throughout July, reaching a two-year low. The Morningstar MSCI Currencies Hedge Fund Index rose 3.9% in July, making it one of the best performing indexes for the month.

Unlike currency or commodity markets, the U.S. and the European stock markets were directionless until the president of European Central Bank vowed to do ‘whatever it takes’ to save the Euro on the 25th. The late month rally drove the S&P 500 TR Index and the MSCI Europe NR Stock Index into the black, rising 1.4% and 1.1%, respectively. North America and Europe focused hedge funds underperformed the stock markets due to their short positions – the Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Europe Hedge Fund Index returned 0.4% and 0.2%, respectively.

Small capitalization stocks underperformed large capitalization equities in July, as evidenced by the 1.4% decline of the Russell 2000 TR Index. The Morningstar MSCI Small Cap Hedge Fund Index was one of the few hedge fund indexes that posted a negative return this month – dropping 0.8%.

In June, single-manager hedge funds and funds of hedge funds in Morningstar's Hedge Fund Database leaked $4.4 billion and $2.1 billion, respectively. The Europe long/short equity category experienced the heaviest redemptions among all single-manager categories, bleeding $1.8 billion. The long/short debt and diversified arbitrage categories received inflows of $277 million and $105 million, respectively.

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Terry Tian is an alternative investments analyst at Morningstar.
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