Morningstar, Inc., a provider of independent investment research, has reported preliminary hedge fund performance for August 2009 and asset flows through July 2009. Hedge funds’ good fortunes persisted in August. The Morningstar 1000 Hedge Fund Index and the currency-hedged Morningstar MSCI Composite Hedge Fund Index rose 1.6% and 1.5%, respectively in August. For the year to date through August, these indexes increased 13.7% and 9.5%, respectively.
“Hedge fund returns in August were driven by strong equity markets throughout the developed world,” says Nadia Papagiannis, Morningstar hedge fund analyst. Many hedge funds claim to be uncorrelated to the markets, but it appears that the rising tide of the market has lifted all boats, including hedge funds.
Developed countries’ stock markets rallied for the sixth straight month on positive news in areas such as manufacturing. The Morningstar MSCI Developed Markets Hedge Fund Index appreciated in August by 1.9%, with the Morningstar MSCI Europe Equity Hedge Fund Index outperforming with an increase of 2.9%, as European stock markets hit 11-month highs on better-than-expected economic data in France and Germany. In the United States, continuing the year-long trend, smaller-company equities outperformed larger-cap stocks. The Morningstar US Small Cap Equity Hedge Fund Index rose 1.9% versus the Morningstar US Equity Hedge Fund Index’s 1.4% rise.
Emerging market equities stagnated in August, with gains in Eastern Europe and certain other countries offset by steep losses in China. The Shanghai Composite Index experienced a severe sell-off, dropping nearly 7% on the last day of the month to its lowest level since May. The sell-off was fueled by fears that the Chinese government may curb stimulus measures. The Morningstar Emerging Markets Equity Hedge Fund Index rose 1.6%, as many funds in this index had lighter weightings in China than did the index.
Crude oil prices dropped modestly in August, but not enough for trend-following hedge funds to profit. These funds did however benefit from a sharp rise in the price of sugar driven by both a supply shortage and an increased demand from ethanol producers as well as a steady fall in natural gas prices due to overstocked inventories and slower demand. Overall, August proved profitable for the funds in the Morningstar Global Trend Hedge Fund Index, which rose 1.3%. The Morningstar Global Non-Trend Hedge Fund Index, which includes funds that trade currencies and government bonds, posted a more modest rise of 0.7%. Currency trading experienced low volatility and central banks left interest rates unchanged.
The big winners in August were hedge funds that trade distressed securities. Credit markets, notably the more speculative ones, continued to rebound in August, though the pace of appreciation has slowed. Global corporate bond issuance broke 2007 levels in August, improving liquidity, and leveraged loan prices reached 12-month highs with some new issues. The Morningstar Distressed Securities Hedge Fund Index rallied 4.1%.
The Morningstar Convertible Arbitrage Hedge Fund Index continued to rise, increasing 2.8% in August and 28.1% for the year, posting the best 2009 Morningstar Category Index record besides the Morningstar Emerging Markets Hedge Fund Index, which is up 33.5% year to date. Surprisingly, despite positive hedge fund returns throughout most of 2009, investors pulled $2.8 billion out of hedge funds in the Morningstar database in July.
D.C.