Risk-on propels hedge fund returns in January.
The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.9% in January and advanced 6.3% for the trailing 12 months. Almost all Morningstar MSCI hedge fund indexes rose in January, and the trailing 12 months showed declines in only the Short Bias and Systematic Trading categories. Reduced global economic and political uncertainty during January fueled a broad increase in appetite for risky assets. Excluding the Short Biased category, all hedge fund strategies were up for the month, and the most risk-sensitive strategies posted the strongest performance.
January started with a two-day rally in equity markets that accounted for most of the 5.2% rise in the S&P 500 Index for the month. The Morningstar MSCI North America Hedge Fund Index, which primarily includes long-short equity hedge funds, ended the month up 2.3%. Small-cap strategies faired even better. The Russell 2000 Index jumped 6.3%, while the Morningstar MSCI Small Cap Hedge Fund Index rose 3.9%.
The Morningstar MSCI Emerging Markets Hedge Fund Index also rose substantially, up 3.0% in January, driven by positive economic news from China about GDP and exports. These positive signals also supported the performance of the Morningstar MSCI Asia Pacific Hedge Fund Index and MSCI AC Asia Index, which climbed 4.9% and 2.5%, respectively. Short sellers were caught short by the broad-based rally, however, pushing the Morningstar MSCI Short Bias Hedge Fund Index down 5.2%.
Widespread investor optimism also sent less risky fixed-income strategies, such as those involving Treasuries and investment-grade corporate bonds, down during January, but high-yield and relative-value hedge fund strategies posted gains. The Morningstar MSCI Long-Short Credit and Fixed Income Arbitrage Hedge Fund Indexes increased 0.7 and 0.9%, respectively, in January. The month-long equity rally as well as rising prices across the energy, agricultural, and metal commodity futures markets also supported price-trend following managed futures strategies in January, leading to a 2.8% rise in the Morningstar MSCI Systematic Trading Hedge Fund Index. January’s uptick was not enough to offset previous losses, however, and the Systematic Trading Hedge Fund Index was down 1.2% over the past 12 months.
In December 2012, single-manager funds in Morningstar’s Hedge Fund Database saw outflows of $4.7 billion, marking the fourth consecutive month of outflows, and representing more than half of the $7.0 billion that investors pulled from hedge funds in the database during 2012. This was a sharp reversal from investor behavior seen during 2011 and 2010, when funds in the Morningstar Hedge Fund Database received inflows of $17.9 and $10.1 billion, respectively.
The largest redemptions came from multistrategy hedge funds, which gave up $1.7 billion, or 35% of the redemptions in the Morningstar database for the month. Over the calendar year 2012, however, multistrategy funds in the database gathered more assets than any other category of $4.2 billion. Hedge funds in the Systematic Futures category, which trade futures contracts according to trend-following and momentum-based strategies, also suffered in December, losing $826 million, followed by U.S. long/short equity hedge funds, which lost $500 million. Only the Distressed Securities, Emerging Market Long-Only Equity, and Debt Arbitrage hedge fund categories posted inflows of $46 million, $25 million, and $2 million, respectively, in December.