Hedge Funds Underperforming Equities and Bonds - Report

Stephen Harris

24 November 2006

Hedge funds underperformed equities and fixed income in the third quarter, according to the MSCI Hedge Fund Composite Index which returned 0.5 per cent while the MSCI World Equity Index and the MSCI World Sovereign Debt Index gained 4.5 per cent and 1.5 per cent respectively. But during the period of December 2000 to September 2006, the hedge fund index has outperformed both the MSCI World Sovereign Debt Index and the MSCI World Equity Index on an annualized basis. Overall asset flows for funds in the MSCI Hedge Fund Composite Index were $5.8 billion in the quarter, contributing to the year to date total of $31.5 billion. The MSCI Relative Value Index had the largest overall inflow of $2.6 billion in the quarter, while the MSCI Security Selection Index had an overall outflow of $384 million. Over the past five years small funds have outperformed larger funds with returns of 8.61 per cent and 7.84 per cent, respectively. This trend continued in the last quarter as the MSCI Small Funds Index returned 0.58 per cent, while the MSCI Core Fund Index returned 0.44 per cent. The MSCI Relative Value Index had the highest return of 1.7 per cent for the past three months, while the MSCI Directional Trading Index had the worst return of minus 1.2 per cent. Year-to-date, the MSCI Security Selection Index had the highest one-year return of 9.2 per cent, while the MSCI Directional Trading Index performed the worst with a return of 6.5 per cent.