Morningstar, Inc., a provider of independent investment research, reported preliminary hedge fund performance for November 2009 and asset flows through October. Hedge funds rebounded in November following a flat October. Both the Morningstar 1000 Hedge Fund Index and the currency-hedged Morningstar MSCI Hedge Fund Index rose 1.8% amid extremely favorable market conditions. Equity and bond market indexes ended the month sharply positive, despite a month-end sell off triggered by the threat of a Dubai World debt default, which could have affected many major Western banks.
Hedge funds were overshadowed by Novembers equity- and credit-market boom, says Nadia Papagiannis, Morningstar alternative investment strategist. But the state of the global economic recovery is fragile, and prudent investors will continue to hedge and manage risk.
Because hedge funds hedged market exposure, they failed to capture much of the gains in equities. The Morningstar US Equity Hedge Fund Index rose only 2.4% in November, much less than the S&P 500’s 6.0% jump. Developed equity markets performed on par with emerging markets in November. The Morningstar MSCI Developed Markets Hedge Fund Index rose 1.9%, while the Morningstar MSCI Emerging Markets Hedge Fund Index increased 1.7%. The United States led developed markets, as the Federal Reserve announced its intentions to keep interest rates low.
Only two hedge fund strategies posted declines in November. Because most global equity markets rose, the Morningstar Short Equity Hedge Fund Index fell 1.4%. Not all equity markets rebounded in November, though. Japanese equities dropped, as deflation concerns mounted and the yen appreciated against the dollar. The Morningstar Developed Asia Equity Hedge Fund Index and the Morningstar MSCI Japan Hedge Fund Index declined 0.8% and 2.9%, respectively.
The Morningstar Global Trend and the Morningstar MSCI Directional Trading Hedge Fund Indexes, which follow price trends in futures and currency markets, outperformed all other hedge fund category indexes in November, with increases of 3.7% and 3.4%, respectively, in November. Although profits from trading trends in many futures markets were negated by short-term reversals, some markets, such as gold (which rose 14% in November) won consistently.
October saw significant flows into hedge funds of $2.1 billion. European Equity hedge funds as well as Corporate Actions hedge funds, which follow strategies such as merger arbitrage, led the way with inflows of $1.6 billion and $1.3 billion, respectively.
Global merger and acquisition activity in November 2009 rose substantially from the previous months, both in volume and number of transactions. The spreads, or profits, on merger deals, however, are starting to decline from historically high levels. The Morningstar Corporate Actions Hedge Fund Index increased 1.3% in November. Spreads in convertible arbitrage are also narrowing. The Morningstar Convertible Arbitrage Hedge Fund Index gained 1.0% in November, about the same as in October, but much less than earlier in the year.
D.C.