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Positive Hedge Fund Performance in March

A rising appetite for risk overcame the Cypriot banking crisis.

Philip Guziec, CFA, 04/24/2013

March was a strong month for risky assets, despite a strong mid-month hiccup driven by the Cyprus banking crisis. “Statistical arbitrage strategies were able to capitalize on trading opportunities created by this mid-month action.”

The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.5% in February and 4.0% in the first quarter of the year. Over the trailing twelve months, the index rose 7.2%.

The top three performing hedge fund strategies in March were statistical arbitrage, small & mid capand emerging markets The Morningstar MSCI Statistical Arbitrage Hedge Fund Index rose 5.2%, largely driven by a few statistical arbitrage managers who harvested outsized gains from the volatility and the temporary dispersion in asset prices created by the crisis in Cyprus.

Positive U.S. employment and manufacturing data, which confirmed continued U.S. economic growth, drove equities higher in first half of the March, before the Cypriot banking crisis temporarily spooked markets. Stock markets also largely ignored the brewing drama in the Korean peninsula. The Morningstar MSCI Small & Mid Cap Hedge Fund Index  rose 3.3% in March but failed to beat the Russell 2000 or S&P 500 Indexes that rose 4.6% and 3.8%, respectively.

The Morningstar MSCI Emerging Markets Hedge Fund Index, which increased 2.7% in March, fared well in relation to the broad market benchmarks, namely the MSCI Emerging Markets Index, which dropped 1.7% during the month.  Both good news and bad news came out of emerging markets in March, and hedge funds generally managed to stay on the right side of the news flow. Turkish equities outperformed, for example, as a result of strong economic data and a potential reconciliation with Israel and the Kurdish movement. A drop in commodities prices, including oil and copper, however, contributed to declines in other? emerging markets, as did concerns over banking relationships in Cyprus. 

Hedge funds focused on Asian markets also posted decent results in March. The Morningstar MSCI Asia Pacific Hedge Fund Index increased 2.4% during the month, relative to the MSCI Asia Stock Market Index, which rose 1.1% in reaction to the aggressive quantitative easing program initiated by the Bank of Japan to fight deflation. The only Morningstar Hedge Fund Index to suffer a decline in March was the Morningstar MSCI Short Bias All Size Hedge Fund Index, which dove 5.0% as most stock markets rallied. 

In February 2013, single-manager funds in Morningstar’s Hedge Fund Database saw the second consecutive month of aggregate inflows, gaining just $19 million in assets.  Hedge funds in the Global Macro category saw the largest inflows in February, adding $382 million, followed by Event Driven hedge funds, which saw inflows of $207 million.  After multiple years of poor performance, the Systematic Futures category again saw the greatest outflows, losing $664 million in February.  The Long-Only Equity category saw the second greatest outflows, at $196 million for the month.  Over the trailing 12 months, investors have pulled $2.0 billion in aggregate from hedge funds in the Morningstar database. About $3.9 billion were withdrawn from funds in the Systematic Futures category alone over that period.

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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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