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Positive Hedge Fund Performance in April

Stocks and bonds rallied, but commodities fell.

Philip Guziec, CFA, 06/19/2013

Global stocks and bonds rallied in April, while commodity prices sharply declined. The trending markets helped long-short equity and fixed-income strategies as well as momentum strategies. The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.2% in April and 5.1% year to date. Over the trailing 12 months, the index rose 8.0%.

Global equity markets rallied in April driven largely by investors’ conviction that central banks will continue to provide excess liquidity. The Bank of Japan, for example, announced that it will pursue quantitative easing, doubling the country’s monetary base over the next two years. Rising Japanese stocks helped lift the Morningstar MSCI Asia Pacific Hedge Fund Index 2.1% in April. Expectations of more liquidity also pushed down interest rates, which benefited duration-sensitive fixed income securities. The Morningstar Long Short Credit Hedge Fund Index rose 1.0% in April. Its performance was also enhanced by a decline in correlations among securities to levels not seen since mid-2008, as evidenced by the CBOE’s S&P 500 Implied Correlation Indexes.

In contrast, relatively weak economic reports from China pushed down commodity prices, such as oil, gold, and silver. Funds in the Morningstar MSCI Directional Trading Hedge Fund Index, which trade both upward and downward price trends, were able to capitalize on these declines. The Morningstar MSCI Directional Trading Hedge Fund Index rose 1.4% in April. The worst-performing hedge fund index in April was the Morningstar MSCI Short Bias All Size index, which dove 2.6% as most stock markets rallied.

In April 2013, single-manager funds in Morningstar’s Hedge Fund Database lost $770 million in assets. Hedge funds in the Multistrategy category saw the greatest outflows in March, losing $1.1 billion. After multiple years of poor performance, the fund outflows continued for Systematic Futures hedge funds, which lost $780 million. Global Macro hedge funds gain the most assets, adding $958 million, followed by long/short equity strategies, which gained 331 million. Over the trailing 12 months, investors have pulled $6.0 billion in aggregate from hedge funds in the Morningstar database. About $4.8 billion were withdrawn from Managed Futures hedge funds alone over the same period, while $4.5 billion were added to Global Macro hedge funds.

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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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