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West Palm Beach (HedgeCo.net) - Morningstar presented their monthly analysis of hedge fund performance for November and asset flows through October.
"Hedge funds have a long path to recovery ahead of them," said Hedge Fund Analyst Nadia Papagiannis. "November was a better month than the last two, mostly because hedge funds hoarded cash, but they are still losing money on their investments and facing the ongoing challenge of funding investor redemptions."
Hedge funds slid again in November, as the Morningstar 1000 Hedge Fund Index lost 2.5% for the month and 23.7% year to date. Hedged against the appreciating U.S. dollar, the asset-weighted Morningstar Composite Hedge Fund with MSCI Index fared better dropping only 0.8%. Hedge funds charge performance fees on any new profits earned, but those have been scarce since November 2007.
Compounding the funds’ pain, investors have responded to the lackluster performance by pulling more than $20 billion in October, which accounts for the bulk of the $29 billion withdrawn over the last 12 months from hedge funds.
Hedge funds of funds performed better than multi-strategy hedge funds this month, as the Morningstar Hedge Fund of Funds and the Morningstar Multi-Strategy Hedge Fund Indexes dropped 2.3% and 3.0% respectively.
November returns and October asset flows for the Morningstar Hedge Fund Indexes are based on funds that reported as of Dec. 16, 2008. Returns for the Morningstar Hedge Fund Indexes with MSCI are based on funds that reported November performance as of Dec. 14, 2008.
As announced in September 2008, Morningstar is also now calculating 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.
But the news was not all doom and gloom. Once again, the Morningstar Global Trend and Global Non-trend Hedge Fund Indexes performed well, funds in these categories experienced outflows during October, global trend funds saw overall inflows of $9 billion for the first 10 months of the year, more than every other category. Emerging markets fared poorly, as dwindling demand for commodities depressed the equities in commodity-based economies. The Morningstar Emerging Markets Hedge Fund Index lost 5.1% in November.
The Morningstar Developed Asia Hedge Fund Index’s relatively small loss of 0.3% was bolstered by the Bank of Japan’s interest rate cut and stimulus package announcement. The Morningstar Japan with MSCI Hedge Fund Index gained 0.5%. U.S. equity hedge funds performed among the worst this month, small capitalization equities took a beating in November, but most hedge funds hedged, as the Morningstar US Small Cap Equity Hedge Fund Index ended down only 4.6%, as compared to the Russell 2000 Index’s almost 12% decline.
The Morningstar Security Selection with MSCI Hedge Fund Index, with component funds that also take directional bets on equities, lost 2.7%. For the year to date through October, directional Europe and U.S. equity funds experienced significantly more outflows than other categories. Funds that kept a lid on market exposure fared relatively well this month. U.S. Treasuries across the board showed the largest monthly gain in decades amid poor economic data, fears of deflation, and a government plan to buy U.S. mortgage-backed securities.
The Morningstar 1000 Hedge Fund Index, a global, broadly representative benchmark for hedge fund performance, has return history from January 2003.
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Reuters – The days of hedge funds as a red-hot asset class may be cooling, according to a new survey released by fund research firm Morningstar on Monday.
Nearly half of all financial advisers who help wealthy people invest their money said they expect hedge funds to become somewhat less or much less important in clients’ portfolios in the next five years. Among institutional clients like pension funds, 37 percent of those polled said they expect hedge funds to become somewhat less or much less important.
Wealthy investors and pension funds helped hedge fund industry assets double to $1.7 trillion in the last three years, but recently the loosely regulated portfolios have disappointed investors with their worst-ever returns.
West Palm Beach (HedgeCo.net) – Morningstar and Barron’s today released highlights of a recent national survey examining the perception and usage of alternative investments among institutions and financial advisors.
“Our survey found that both institutions and advisors want alternative investments that are liquid, transparent, and regulated like traditional investments,” said Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar. "We conducted this survey during one of the worst market downturns in history, where traditional U.S. and international investments plummeted and almost no alternative investments provided safe haven."
"One particularly interesting survey result was that against this backdrop, the majority of both advisors and institutions still reported that they expected to increase usage of alternative investments in the future, and they believed alternative investments will continue to grow in importance versus traditional investments," Deutsch added. "Recent poor performance of alternatives has not caused advisors or institutions to question their usage."
Among the survey findings are that for institutions limited partnerships, including hedge funds, direct real estate, and private equity, are the most popular alternative vehicles for institutions.
Almost half of institutions surveyed allocate more than 10 percent of their portfolios to alternative investments, and nearly 20 percent allocate more than 25 percent of their portfolios to alternatives. Institutions generally expect their portfolio allocations to alternative investments, particularly hedge funds and private equity, to increase over the next five years. Close to a quarter (23 percent) of institutions expect to invest more than 25 percent of their portfolios into alternatives.
The survey shows that advisors are predominantly investing in alternative investments through liquid, regulated, and transparent vehicles like mutual funds and exchange-traded funds (ETFs), but they’re also employing other non-traditional investments with their clients, like oil and gas limited partnerships, non-traded Real Estate Investment Trusts (REITs), church bonds, and equipment leasing.
Among advisors who work with average individual investors, almost 80 percent use alternative investments with some clients. About 40 percent of advisors had more than half of their higher-net-worth clients in some alternative investments.
Morningstar and Barron’s conducted the Internet-based survey in October 2008; 252 institutions and 1,180 financial advisors participated. The complete survey results appear in the Nov. 10 issue of Barron’s.
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West Palm Beach (HedgeCo.net) – The Morningstar 1000 Hedge Fund Index lost 3.12% in August, significantly underperforming U.S. and global equity and bond markets.
August, like July, was characterized by a large drop in emerging markets and commodities. "Even though commodity prices have started to descend, their lofty valuations slowed growth and demand, especially in emerging markets,” said Morningstar Hedge Fund Analyst Nadia Van Dalen. "It was only a matter of time before hedge funds riding these waves crashed."
The Morningstar Emerging Markets Hedge Fund Index lost 7.13% in August while the Global Trend Hedge Fund Index, which profited from a previous upward trend in commodities, lost 5.35%. Both of these indexes experienced similar losses in July. Through July however, these funds continued to receive the largest inflows of assets this year, approximately $10.9 billion.
Unlike emerging market hedge funds, U.S. equity hedge funds fared relatively well. The Morningstar US Equity Hedge Fund Index earned 0.47% in August. Even though these hedge funds performed better than those in other equity categories, they still underperformed the markets—the S&P 500 Index gained 1.45% in August. Similarly, the Morningstar US Small Cap Equity Hedge Fund Index lost 2.81% while the Russell 2000 Index gained 3.61%
The U.S. equity markets were propped up for most of the month by the rising dollar and weakening Euro. Morningstar calculates its hedge fund indexes by converting hedge fund returns into U.S. dollars using the spot rate at the end of the month. This methodology does not hedge U.S. dollar exposure, and reflects the negative impact of Euro-denominated funds.
Along with the Euro, European equity markets dropped in August, reacting to weak economic data. The Morningstar Europe Equity Hedge Fund Index dropped 3.33%. Year to date through July 31, funds in this index have seen the largest outflows, approximately $9.6 billion. Despite the appreciation of the Yen, developed Asian equity markets followed that of emerging markets in general. The Morningstar Developed Asia Equity Hedge Fund Index lost 3.10%. Currency traders on the right side of the dollar, Yen, and Euro trades helped to cushion the blow for the Global Non-trend Hedge Fund Index, which lost 1.63%.
Global bonds, as measured by the Lehman Global Aggregate index ended the month in the red, and the Morningstar Global Debt Hedge Fund Index and the Morningstar Debt Arbitrage Hedge Fund Index both experienced losses of 3.64% and 1.33%, respectively. During the month, credit spreads widened amid financial distress at Fannie Mae and Freddie Mac, hurting funds in these indexes. Volatility in the credit markets also affected funds in the Morningstar Convertible Arbitrage Hedge Fund Index, which lost 1.08%.
Distressed securities funds and corporate event funds continued to wait for a market turn around. The Morningstar Distressed Securities Hedge Fund Index and Corporate Actions Hedge Fund Index dropped 1.28% and 2.34%, respectively. Multi-strategy funds outperformed hedge funds of funds. These indexes fell 2.40% and 3.99%, respectively. Read Complete Article
Bloomberg – Kenneth Heebner, manager of the top-ranked U.S. stock mutual fund, is seeking as much as $5 billion for his first hedge fund.
Heebner, who has worked in the mutual-fund business almost four decades, formed a private investment partnership in June called Wayfarer Capital LP, according to Aug. 14 regulatory filings. The size of the fund, which had raised $73 million from wealthy investors and institutions, may vary from the target, Wayfarer Capital said in the filings.
A private fund would free Heebner from most regulatory oversight and allow him to buy or sell any assets, unlike mutual funds, which are more tightly controlled. Hedge funds also charge higher fees, including a cut of investment profits.
“He has wanted to do this for a long time,” said Janine Hermsdorf, who retired in December as the head trader at Heebner’s Boston-based Capital Growth Management LP after working with him for 27 years. “This was just the time to go ahead.”
Martha McGuire, a spokeswoman for Capital Growth Management, declined to comment on the filings by Wayfarer Capital with the U.S. Securities and Exchange Commission and state regulators. Stephen McShea, an attorney in the Boston office of Dechert LLP, the law firm that helped set up the partnership, also declined to comment.
Heebner’s CGM Focus Fund had the best performance among diversified U.S. stock mutual funds this year through June 30, gaining 17 percent including dividends, compared with the 12 percent decline by the Standard & Poor’s 500 Index, according to data compiled by Chicago-based Morningstar Inc. The fund has since fallen 29 percent, while the benchmark index is off 3.9 percent, illustrating the swings that often accompany Heebner’s approach to stock-picking.
CNBC – Returns are meager or negative, capital flows are slowing and hedge funds appear to be folding at a record rate; so monied investors might be prompted to ask … who needs a hedge fund anyway?
“Institutions have taken over the hedge fund space," says Morningstar analyst Nadia Van Dalen, adding they are intrinsically better able to identify the best-performing funds and then pour money into them. “The high net worth investor is at a worse disadvantage now [than in the past].”
So much for letting the individual investor play with the Big Boys.
West Palm Beach (HedgeCo.net) - Hedge funds saw their worst monthly performance in the history of the Morningstar 1000 Hedge Fund Index. The index returned a negative 3.07% in July 2008, an eventful month for the markets.
In the first half of July, high oil prices and continued trouble in the U.S. banking sector caused equities to tumble and the U.S. dollar to slide, hitting a low point mid-month when the Federal Reserve expressed concerns about economic growth. The announcement of a U.S. government bailout plan for Freddie Mac and Fannie Mae, along with the Securities and Exchange Commission’s short-sale restrictions on financial stocks allowed for a partial rebound in the second half of the month. "In July, the bet on long commodities and short financials didn’t work as well for hedge funds,” said Daniel Farkas, hedge fund analyst for Morningstar.
Commodities showed their worst month in more than five years. The S&P GSCI Index, a commodities index heavily weighted in energy, fell more than 12% in July, as the price of crude oil plunged from its July 2 peak on weaker demand forecasts. European and Asian central banks attempted to combat inflation with interest rate hikes, causing a slide in those equities markets.
Consequently, the Morningstar Europe Equity, Morningstar Asia Equity, and Morningstar Emerging Markets Equity Hedge Fund Indexes saw much strife in July, though not as much as the Morningstar Global Equity Hedge Fund Index, which lost almost 8%. The Morningstar US Equity Hedge Fund Index also performed poorly, underperforming the S&P 500 Index by more than two percentage points.
"It’s unusual for hedge funds to underperform equities in down markets, but hedge funds haven’t been able to navigate the credit crunch that started last summer” added Farkas. The MSCI World Index outperformed the Morningstar 1000 Hedge Fund Index in four of the 24 down months since January 2003, the inception of the Morningstar 1000 Hedge Fund Index. Three of these four months occurred in the last year.
Because July also saw big losses in commodities, the Morningstar Global Trend Hedge Fund Index halted its upward trend. For the year, however, this index still outperformed every other Morningstar hedge fund category index by a wide margin. Year-to-date through June 2008, hedge funds in the Morningstar Global Trend category also experienced the highest inflows, at almost $10 billion. For the month of June, hedge funds overall saw more than $10 billion of inflows.
Multi-Strategy hedge funds had more than double the inflows of other categories, placing second only to Global Trend hedge funds. In a dynamic macro-economic environment, Multi-Strategy hedge funds can be more nimble than single-strategy hedge funds, quickly allocating assets to strategies with a brighter outlook, while pulling away from strategies with more dismal prospects. In July, however, most hedge fund strategies proved unprofitable, and the Morningstar Multistrategy Hedge Fund Index lost more than 3.67%.
Funds-of-Funds outperformed the Morningstar 1000 Hedge Fund Index in July, returning a negative 2.41%. Year-to-date, the Morningstar Hedge Funds of Funds Index has lost 2.52%.
Returns are based on hedge funds in the Morningstar hedge fund indexes that reported performance as of August 8, 2008.
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Reuters UK – U.S. airlines are cheering a steep decline in the price of jet fuel since mid-July, when crude oil began a nearly $27-per-barrel descent, but that good news may come with a slight sting for carriers that locked in fuel prices when oil was at its peak.
The risk is that oil may drift below the current price airlines guaranteed with hedging contracts, which are usually options. If that happens, the hedges carriers purchased could be a waste of money.
Worse yet, it is possible some airlines could be committed to paying more for their fuel than market prices.
"Given some of the hedging mechanisms they are using, they are going to be subject to significant losses on those portfolios. We’ve never seen such volatility on oil prices," said Brian Nelson, equity analyst at Morningstar.
West Palm Beach (HedgeCo.net)- In a summary of hedge fund performance for the second quarter of 2008, Morningstar, Inc. marked June as a bad end to a good quarter. The Morningstar 1000 Hedge Fund Index fell 0.73% during the month, pushing down second-quarter returns to 2.07%. Year to date, the index is up only 0.31%, as hedge funds struggled through poor market conditions.
Overall, hedge funds, including funds of hedge funds, buffered the traditional stock and bond markets over the second quarter. Equity and bond markets saw losses all over the world, while the Morningstar Fund of Hedge Funds Index gained 1.43%. Over the last year, the Morningstar 1000 Hedge Fund Index and the Morningstar Fund of Hedge Funds Index outperformed the major global stock indexes, which experienced double-digit declines (with the exception of emerging markets). Both hedge funds and funds of hedge funds underperformed bond markets, however, over this same period.
“Equity markets suffered steep declines in June,” said Morningstar hedge fund analyst Nadia Van Dalen. “Volatility returned to levels not seen since March, amid fears of recession and rising inflation. Most hedge funds are not immune to these economic shocks, despite what their name might imply.”
There were significant exceptions. Over the last 12 months, the Morningstar Global Trend Hedge Fund Index, which tracks funds that profit from price trends in futures, options and currencies, benefited from the sharp rise in commodity prices, returning over 18% (3.28% in June). Funds in the Morningstar Global Non-trend Hedge Fund Index, those that take macro-economic bets on interest rates and currencies, benefited from the falling dollar and the rising Euro, earning 0.33% in June and more than 12% over the last 12 months. The last 12 months also saw high volatility. Those equity arbitrage funds that specialize in trading volatility helped drive the Morningstar Equity Arbitrage Hedge Fund Index to a gain of more than 8.57% in the last year and 1.12% in June.
Not surprisingly, these top-performing categories have also experienced the most inflows. For the period ending May 31 (asset flow reporting lags performance reporting), hedge fund investors poured more than $6 billion into global trend funds and $2.4 billion into global non-trend funds tracked by Morningstar. On the opposite end of the spectrum, investors fled the U.S. equity and Europe equity hedge funds in the Morningstar database, taking more than $7.7 billion and $6.9 billion out of these categories, respectively.
Morningstar’s hedge fund flow data also show that, through May, assets moved to the Morningstar-rated 4-, and 5-star hedge funds, and redeemed the 1-, 2-, and 3-star hedge funds. Four- and 5-star hedge funds received more than $10 billion in new assets through May, while 1- and 2-star hedge funds bled almost $10 billion in assets over the same period.
Returns of Morningstar’s Broad Category Indexes, indexes that group funds in related categories, highlight that the event-driven funds were the hardest hit. This index includes funds in the Morningstar Corporate Actions and Distressed Securities Categories, which sometimes take bets on depressed or out-of-favor companies, and look for a reversal over the longer-term. These bets may look worse before they look better, given the economic conditions.
Morningstar has approximately 8,500 hedge funds and funds of hedge funds in its database and is is a leading provider of independent investment research in North America, Europe, Australia, and Asia.
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Reuters India- U.S. firm Morningstar Inc will expand its investment research coverage to Indian funds by early next year and hopes to hire 10-20 staff by March, a senior executive said on Monday.
Morningstar, founded by its Chairman and Chief Executive Joe Mansueto in his Chicago apartment in 1984, has made a name for itself by rating mutual funds, hedge funds and stocks and is popular for its star system of rating fund performance.
"India represents a very important investment area worldwide. So we need to be here not only to serve the Indian market but for the global investment community," Jaideep Vivekanand, director of business development for India at Morningstar Asia Ltd, said.
