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Positive Hedge Fund Performance Continues In February

Hedge funds in aggregate posted positive returns in February, but challenging conditions persisted for momentum.

Philip Guziec, CFA, 03/22/2013

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 0.5% in February and 2.5% in the first two months of the year. Over the trailing twelve months, the index rose 5.4%. Most hedge fund managers took advantage of the modest rally that continued for risky assets in February.  However, trend-following strategies continued to struggle as markets moved in fits and starts.

The top three performing hedge fund strategies in February were small/mid cap, European, and emerging market equities. The Morningstar MSCI Small & Mid Cap Hedge Fund Index rose 2.6%, driven largely by one healthcare-oriented long/short equity fund. European markets reacted to rising concern over a worsening European fiscal crisis after recent Italian elections left the future of austerity measures unclear. The announcement from the International Monetary Fund and others that U.S. government spending cuts could lower global growth compounded concern. The MSCI Europe Index fell 2.8% for the month on this news, but hedge funds operating in the space, as measured by the Morningstar MSCI Europe Hedge Fund Index, were able to generate a 2.2% increase.  Emerging markets also reacted to the European and U.S. events as well as to GDP growth data that came in below expectations for India and Brazil. While the MSCI Emerging Markets Index declined 1.3%, hedge fund managers took advantage of these events. The Morningstar MSCI Emerging Market Hedge Fund Index increased 1.1%. 

Other notable hedge fund indexes with strong performance were the Morningstar MSCI Distressed Securities Hedge Fund Index and the Morningstar MSCI Equity Hedge Fund Index, which rose 1.0% and 0.8%, respectively, in February. However, both hedge funds indexes trailed the S&P 500 and Morningstar All-Cap Deep Value Indexes, which rose 1.4% and 1.2%, respectively.

The worst-performing strategies for February were global macro and trend-following. The challenging conditions of rapid trend reversals that have prevailed for over two years continued in February. The Morningstar MSCI Systematic Trading Hedge Fund Index, which represents trend-following strategies, posted a 1.6% decline, while the Morningstar MSCI Directional Trading Hedge Fund Index, which also includes global-macro strategies, was down 1.2% for the month.

In January 2013, single-manager funds in Morningstar’s Hedge Fund Database saw inflows of $3.3 billion, marking the first month of inflows after four months of outflows. Hedge funds in the Multistrategy category received the largest inflows in January, adding $1.8 billion collectively. Global macro hedge funds also saw inflows, gaining $873 million in assets. The biggest outflows occurred in the Long-Only Other and Global Long/Short Equity categories, leaking $738 million and $142 million, respectively, during the month. Over the trailing 12 months, investors have pulled $1.1 billion from hedge funds in the Morningstar database.

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Philip Guziec, CFA, is Morningstar's derivatives investing strategist. He leads Morningstar's OptionInvestor service, which applies Morningstar's fundamental research methodology and fair value estimates on 2,000 stocks to uncover option investing opportunities. Guziec joined Morningstar in 2003 after a career as an engineer and management consultant. Learn more about OptionInvestor.
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