Equity markets suffered steep declines in June. 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% for the quar
ter (3.28% in June). Funds in the Morningstar Global Non-Trend Hedge Fund Index, those that take macroeconomic 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 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, with redemptions in 1- and 2-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 about $10 billion in assets over the same period.
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 worldwide, 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). However, both hedge funds and funds of hedge funds underperformed bond markets over this 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-favour companies, and look for a reversal over the longer term. These bets may look worse before they look better, given the economic conditions.
| YTD Flows Mil USD |
12-Mo Flows Mil USD |
May Assets Mil USD |
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|---|---|---|---|---|
| 5-Star | 4,247.00 | 9,383.00 | 88,000.00 | |
| 4- Star | 6,122.00 | 17,112.00 | 154,000.00 | |
| 3-Star | 96.00 | 2,631.00 | 204,000.00 | |
| 2-Star | (6,588.00) | (12,478.00) | 59,000.00 | |
| 1-Star | (3,727.00) | (6,291.00) | 20,000.00 | |
| Not Rated | (1,323.00) | 10,662.00 | 127,000.00 | |
 |
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| Total | (1,173.00) | 21,019.00 | 652,000.00 | |
| Morningstar Convert. Arb. HF | (1,540.00) | (1,544.00) | 10,000.00 | |
| Morningstar Corporate Actions HF | 327.00 | 7,411.00 | 57,000.00 | |
| Morningstar Debt Arbitrage HF | (973.00) | 4,356.00 | 32,000.00 | |
| Morningstar Dev. Asia Equity HF | (306.00) | (1,972.00) | 16,000.00 | |
| Morningstar Distressed Sec. HF | 776.00 | 1,786.00 | 29,000.00 | |
| Morningstar Emrg. Mkt. Equity HF | 1,778.00 | 5,516.00 | 55,000.00 | |
| Morningstar Equity Arbitrage HF | 2,186.00 | 3,054.00 | 48,000.00 | |
| Morningstar Europe Equity HF | (6,950.00) | (5,771.00) | 60,000.00 | |
| Morningstar Global Debt HF | 2,564.00 | 3,456.00 | 50,000.00 | |
| Morningstar Global Equity HF | (1,868.00) | (1,799.00) | 33,000.00 | |
| Morningstar Global Non Trend HF | 2,495.00 | 5,377.00 | 52,000.00 | |
| Morningstar Global Trend HF | 6,120.00 | 5,549.00 | 53,000.00 | |
| Morningstar Multistrategy HF | 1,759.00 | 4,343.00 | 72,000.00 | |
| Morningstar Short Equity HF | 313.00 | 787.00 | - | |
| Morningstar US Equity HF | (7,752.00) | (9,618.00) | 84,000.00 | |
| Morningstar US Small Cap Eqty HF | 103.00 | 100.00 | 10,000.00 | |
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| Total | (1,174.00) | 21,031.00 | 653,000.00 | |
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| U.S. dollar terms Flows based on hedge funds in Morningstar's database that reported assets as of July 11, 2008. |
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