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September Hedge Fund Review

Equity-focused hedge funds were the biggest winners in September.

Terry Tian, 10/17/2012

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in Morningstar's hedge fund database, rose 0.7% in September, ending the third quarter up 3%. Global equity markets rallied on the back of monetary easing steps taken by central banks, and equity-focused hedge funds were the biggest winners in September. 

The U.S. stock market continued to climb in September, as the Federal Reserve rolled out the third round of quantitative easing. The S&P 500 Index and the Russell 2000 Index rose 2.6% and 3.3% in September, respectively, and 6.2% and 5.2% over the quarter, respectively. Equity-focused hedge funds lagged the broad market due to their hedging positions but still delivered some of the strongest returns among all hedge fund strategies. The Morningstar MSCI Equity Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index returned 1.9% and 2.9% in September, ending the third quarter up 3.6% and 4.6%, respectively.

The supportive policies of the U.S. Federal Reserve and the European Central Bank helped drive emerging-markets stock prices higher as well. The MSCI EM NR Index jumped 6% in September (up 7.7% for the third quarter). The Morningstar MSCI Emerging Market Hedge Fund Index rose 1.7% in September (up 3.4% for the third quarter). 

Event-driven strategies delivered the third consecutive month of positive returns, as merger deal flow and risk appetite remained strong. The Morningstar MSCI Event-Driven Hedge Fund Index turned out to be one of the best-performing hedge fund indexes, rising 3% in September and finishing the third quarter up 5.1%. 

September proved to be a difficult month for managed-futures strategies, however, due to reversals in commodity markets. Crude oil prices, for example, rose in early September but reversed later in the month as Saudi Arabia increased production and China slowdown concerns renewed. Major agricultural commodities, such as corn and soybeans, fell in September after an extended summer ascent. The Morningstar Systematic Trading Hedge Fund Index declined 0.7% for the month but remained up 2.2% for the quarter. 

In August, single-manager hedge funds in Morningstar's hedge fund database leaked $1.8 billion. The systematic futures category experienced the heaviest redemptions among all single-manager categories, bleeding $3.4 billion. The debt arbitrage and global macro categories received inflows of $784 million and $438 million, respectively.

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Terry Tian is an alternative investments analyst at Morningstar.
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