Morningstar reported preliminary hedge fund performance for August 2010 and asset flows through July. Hedge funds held up in August, as the Morningstar 1000 Hedge Fund Index rose 0.1% and the currency-hedged Morningstar MSCI Composite Hedge Fund Index increased 0.6% against a decline in global equity markets, particularly in the United States.
The Morningstar U.S. Equity Hedge Fund Index fell 2.4%, approximately half as much as the S&P 500. Hedge funds specializing in small-market-capitalization stocks hedged even more effectively. The Morningstar U.S. Small Cap Equity Hedge Fund Index dropped 1.5% versus the Russell 2000 Index’s 7.4% dive this month.
“Riskier assets such as equities have moved in concert either up or down over the last several months, a trying environment for many hedge fund strategies,” said Nadia Papagiannis, alternative investment strategist for Morningstar. “But hedge funds effectively preserved capital in August.”
August was characterized by a general selloff in risky assets, not just equities, after the Federal Reserve confirmed weakness in the U.S. economy early in the month. Investors flocked toward the safety of U.S. Treasuries, driving down interest rates to historic lows and prices on bonds higher. Price-trend following managed futures funds capitalized on the upward trend in Treasury futures, which resulted in a 3.5% climb in the Morningstar Global Trend Hedge Fund Index in August. Trend-following strategies have suffered for most of 2010, but August’s results pushed many of these funds into the black. Along with government bonds, precious metals benefited from investors’ flight from risk, a profitable theme for several macro-economic oriented funds in Morningstar’s Global Non-Trend Hedge Fund Index.
Fixed-income hedge fund strategies also profited from risk-aversion trades. The Morningstar Global Debt Hedge Fund Index grew 1.3% in August. Even though riskier credits underperformed in August, convertible arbitrage strategies were able to post gains, primarily due to high volatility. The Morningstar Convertible Arbitrage Hedge Fund Index increased 1.0%. And even though equity markets tanked in general, merger activity picked up steam. The Morningstar MSCI Merger Arbitrage Hedge Fund Index rose 1.0% in August.
For the year to date through July, funds in Morningstar’s Corporate Actions Hedge Fund Index, which also engage in merger arbitrage, received large inflows of $2.3 billion. Global Non-Trend funds also experienced inflows, of $2.6 billion. Most other hedge fund categories suffered outflows in 2010, especially multi-strategy funds.