Slowing economic growth in emerging markets weighed on hedge funds in November.
CHICAGO, Dec. 18, 2013—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today reported preliminary hedge fund performance for November 2013 as well as estimated asset flows through October. 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 1.0% in November, along with global stock markets. The MSCI World NR global stock index climbed 1.8%, and the Barclays Global Aggregate TR bond index fell 0.8% in part due to rising U.S. interest rates in November. The Morningstar MSCI Composite AW Hedge Fund Index has increased 8.2% for the year through November.
The Morningstar MSCI Emerging Markets Hedge Fund Index fell 1.8% in November, as GDP growth came in lower than expected in key emerging markets. Hedge funds lost more than the unhedged MSCI Emerging Markets Index, which declined 1.5%, due to greater exposure to Brazil, Russia, and India—some of the worst-performing countries. However, the Morningstar MSCI Emerging Markets Hedge Fund Index has increased 3.6% for the year through November, while the MSCI Emerging Markets Index has fallen 1.2%.
U.S. equity-based hedge fund strategies, on the other hand, profited from favorable economic reports and expectations of a rising U.S. Dollar. The Morningstar MSCI North America Hedge Fund Index increased 1.2% for the month as the S&P 500 reached new all-time highs. Similarly, the Morningstar MSCI Small Cap Hedge Fund Index, which represents small-cap long-short equity strategies, rose 1.9% in November, while the Russell 2000 Index climbed 4.0%. The Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index have risen 11.9% and 19.3%, respectively, year-to-date through November while the S&P 500 and Russell 2000 Indexes increased 29.1% and 36.1%, respectively.
European equity-focused hedge funds increased modestly as the European Central Bank unexpectedly cut interest rates in November. The Morningstar MSCI Europe Hedge Fund Index advanced 1.0% in November and 10.5% for the year to date, compared with 1.2% and 22.5%, respectively, for the unhedged MSCI Europe NR stock index.
Fixed income hedge funds eked out increases despite rising interest rates in the United States. The Morningstar MSCI Fixed Income Hedge Fund Index inched up 0.3% in November, aided in part by exposure to European bonds. The Morningstar MSCI Fixed Income Arbitrage Hedge Fund Index also rose 0.7% as U.S. high yield spreads narrowed. The Morningstar MSCI Fixed Income Hedge Fund Index and Morningstar MSCI Fixed Income Arbitrage Hedge Fund Index have increased 4.4% and 3.1% for the year to date, respectively, benefiting from hedged duration risk throughout 2013. In contrast, the unhedged Barclays Global Aggregate TR Index decreased 0.8% in November and has fallen 2.0% for the year to date.
Managed futures hedge fund strategies were buoyed higher as equities, metals, and currencies continued their previous-month trends. The Morningstar MSCI Directional Trading Hedge Fund Index, which includes both discretionary and systematic futures-based strategies, gained 1.2%, and the Morningstar MSCI Systematic Trading Hedge Fund Index rose 1.4% in November. Year to date, the Morningstar MSCI Directional Trading Hedge Fund Index increased 1.7%, but the Morningstar MSCI Systematic Trading Hedge Fund Index fell 1.0%, as hedge funds struggled with volatility surrounding U.S. monetary policy expectations between May and October.
Unrelated to the broad markets, arbitrage strategies performed well in November. The Morningstar MSCI Arbitrage Hedge Fund Index rose 1.0%, and 4.4% for the year to date. Merger arbitrage strategies continued to see increased deal flow as corporations have started to deploy some of their cash hoards.
In aggregate, single-strategy hedge funds experienced net outflows of $1.7 billion in October. The systematic futures category led the losses for the second straight month with outflows of $972 million, adding to its growing loss of $9.2 billion for the year through October. In contrast, multistrategy hedge funds received net inflows of $976 million. The multistrategy hedge fund category has raised $1.7 billion since January 2013 on increased demand for diversified alternative offerings. For the year through October, funds with no rating have raised $6.5 billion in assets, while rated funds have shed $12.2 billion.
November returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of Dec. 16, 2013. October asset flows are based on funds that reported as of Dec. 12, 2013. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar DirectSM, the company’s global research platform for institutions.