Hedge fund strategies rebounded after June's decline.
The Morningstar MSCI North America Hedge Fund Index led world regions for the second straight month with a 2.5% increase. Small-cap hedge fund strategies performed particularly well—the Morningstar MSCI Small Cap Hedge Fund Index, which primarily represents small-cap equity strategies in the United States, climbed 3.3% in July and 12.0% for the year to date. It remains the top performer of all the Morningstar MSCI Hedge Fund Indexes with a 19.8% increase for the trailing 12 months. In comparison, the unhedged Russell 2000 Index surged 7.0% in July, 24.0% for the year to date, and 35.0% for the trailing 12 months.
A larger than expected increase in German manufacturing output and a decline in Portugese unemployment suggested that a Pan-European economic recovery may be imminent, boosting performance for Europe-focused hedge funds. The Morningstar MSCI Europe Index climbed 1.6% for the month and 5.7% for the year to date. In comparison, the unhedged MSCI Europe index rocketed 7.4% in July and 9.7% for the year to date.
In contrast, slowing growth and high inflation in emerging markets continued to plague the Morningstar MSCI Emerging Markets Hedge Fund Index, which inched up only 0.7% in July and 2.7% for the year to date. The hedge fund index has performed well versus the passive MSCI Emerging Markets Index, however, which advanced 1.0% in July but plummeted 8.6% for the year to date.
Systematic trading, or momentum-based, hedge fund strategies also struggled as market volatility sent mixed signals to trading algorithms. The Morningstar MSCI Systematic Trading Hedge Fund Index sank 0.4% in July, extending its year-to-date decline to 1.8% and continuing its two-year losing streak.
Debt-oriented hedge fund strategies began to turn up as the 10-year U.S. Treasury note yield stabilized at 2.6%. The Morningstar MSCI Fixed Income Hedge Fund Index rose by 0.5% in July and 2.1% for the year to date. The Morningstar MSCI Fixed Income Arbitrage Hedge Fund Index increased 0.6% in July and 0.9% for the year to date. In contrast, the Barclays U.S. Aggregate Bond Index advanced by 1.3% in July and fell 3.6% for the year to date.
In June 2013, single-manager hedge funds in Morningstar’s database saw net outflows of $851 million, but collected $1.3 billion in net inflows for the year through June. No hedge fund category received significant inflows during the month, possibly due to investor fears incited by market volatility. Multistrategy hedge funds experienced the largest net outflows for the month of $1.4 billion, although net capital flows are still positive for the first half of the year at $417 million. Systematic trading strategies experienced net outflows of $267 million of in June and $3.6 billion for the first half of the year likely due to continued poor performance.