Hedge Funds Inch Up In April

Harriet Davies

25 May 2012

The Morningstar MSCI Composite Hedge Fund Index, which tracks nearly 1,000 funds, inched up 0.2 per cent in April, in a poor month of performance for equities broadly.

"After a strong first-quarter rally, equity markets across the globe hit a bump in April," said Mallory Horejs, alternative investments analyst at Morningstar. "Hedge fund performance was mixed, with arbitrage and fixed-income strategies posting the highest gains."

As a comparison with equities, the MSCI World Stock Market Index declined 1.1 per cent; the S&P 500 declined around 0.6 per cent, while the MSCI’s European equities index, hit by the mounting crisis in Greece, dropped 2.9 per cent.

In this context, the MSCI North America Hedge Fund Index slipped 0.4 per cent last month, while small caps were hit harder by a loss of investor confidence, as the Russell 2000 Index fell 1 per cent and the Morningstar MSCI Small Cap Hedge Fund Index fell further, by 1.5 per cent.

Short-sellers capitalized on renewed economic fears, according to the Morningstar data, delivering the best strategy performance for the month, as the short bias index clocked up a 1.7 per cent gain.

As talk about a soft or hard "landing” in China rumbles on, economic data suggested “decelerating growth” in Asia, and especially in the region’s largest economy. The MSCI Asia Pacific index dropped 0.7 per cent, “but sheltered investors from the MSCI AC Asia Stock Market Index's 1.4 per cent fall,” the firm said.

Meanwhile, escalating political and economic turmoil in the eurozone and Standard and Poor’s downgrade of Spain’s credit rating, which put the country on a par with Ireland and Italy, coincided with a 2.3 per cent fall in the MSCI Europe NR Index. The Morningstar MSCI Europe Hedge Fund Index, however, ended the month flat.

Fundamentally-driven macro strategies failed to deliver a strong April performance amid falls in the prices of gold and soybeans, and ended the month down 1.3 per cent as measured by the Morningstar MSCI Discretionary Trading Hedge Fund Index. Systematic trend-following strategies notched up a 0.1 per cent increase.

Fixed-income strategies fared relatively well in this climate, with the Morningstar MSCI Fixed Income Arbitrage Hedge Fund Index climbing 1.3 per cent.

Consecutive outflows

March – the latest month for which asset flow data is available – marked the fourth consecutive month of net outflows for the hedge funds tracked in Morningstar’s database, as a net $655 million was withdrawn from these funds. “ magnitude of the flows appears to be subsiding somewhat, as figures from the previous months were all well above $1 billion,” said Morningstar.

Global macro strategies suffered large redemptions, as around $786 million was pulled out of these funds in March, bringing net redemptions for the first quarter to over $2 billion.

Funds of hedge funds, meanwhile, saw outflows of $1.7 billion in March alone, according to Morningstar’s database, as investors moved into single-manager multi-strategy funds, which gained around $160 million in inflows over the month.