Morningstar, Inc., a leading provider of independent investment research, today reported preliminary hedge fund performance for July 2013 as well as estimated asset flows through June. The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, rose 1.1% in July, mitigating half of last month’s decline and pushing its year-to-date increase to 4.0%. Global stock and bond indexes also increased; the MSCI World NR global stock market climbed 5.3% and the Barclays Global Aggregate TR bond index advanced 1.3%.
“Most hedge fund strategies notched gains in July following June’s decline, but developed markets equity strategies were clear winners,” AJ D’Asaro, fund analyst at Morningstar, said. “The Morningstar MSCI Developed Markets Hedge Fund Index advanced 2.0% in July, extending its year-to-date increase to 6.4% as Europe and Japan showed signs of a turnaround and U. S. interest rates stabilized.”
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.
July returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of August 21, 2013. June asset flows are based on funds that reported as of August 15, 2013. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar DirectSM, the company’s global research platform for institutions.
Morningstar has approximately 11,000 hedge funds and funds of hedge funds in its database. Morningstar calculates hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstar’s hedge fund database. These indexes demonstrate the performance of hedge funds to investors who have hedged their currency exposure back into U.S. dollars. The MSCI Hedge Fund Index Methodology classifies hedge funds by investment process, geography, and asset class. These indexes are not investible.
This release is not intended to be an offer or solicitation for the sale of hedge funds. The information is not warranted to be accurate, complete, or timely. When considering hedge funds, investors should consider various risks, including the fact that some products engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager. The high degree of leverage that is often obtainable in trading can lead to large losses as well as gains. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 433,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on nearly 10 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has more than $166 billion in assets under advisement and management as of June 30, 2013. The company has operations in 27 countries.