Equity Markets Boost Q2 Hedge Fund Returns

July 21, 2009 (PLANSPONSOR.com) - For the second quarter of 2009, the Morningstar 1000 Hedge Fund Index posted its largest quarterly increase, 9.25%.

During the second quarter, the currency-hedged Morningstar MSCI Asset Weighted Hedge Fund Composite Index rose 5.12%, and the Morningstar MSCI Equal Weighted Hedge Fund Composite Index rose 8.77%, according to a press release. Morningstar said the substantially stronger increase of the equal-weighted hedge fund index indicates the lower-risk posture adopted by many of the industry’s biggest funds, which held them back during the quarter’s rally.

Hedge funds that were most geared to the equity markets fared best in Q2. The Morningstar Emerging Markets Hedge Fund Index and the Morningstar U.S. Small Company Equity Hedge Fund Index, rose 24.93% and 19.72%, respectively. The Morningstar Developed Asia Equity Hedge Fund Index rose 13.33%, and the Morningstar U.S. Equity Hedge Fund Index rose 12.72%.

The laggard among net long equity indexes, the Morningstar MSCI Europe Hedge Fund Index, still managed to rise a healthy 4.97% in the quarter, although these results might be considered disappointing given that the MSCI Europe Stock Index soared by 22.96% in U.S. dollars. The press release said the discrepancy occurred largely because the MSCI Europe Stock Index enjoyed currency gains resulting from the appreciation of the U.S. dollar against the Euro, while the funds in the hedge fund index were mostly denominated in local currencies.

Following on the heels of the equity hedge fund indexes were those funds exposed to less-liquid or lower-quality debt markets. The Morningstar Corporate Actions Hedge Fund Index jumped 12.55%; the Morningstar Global Debt Hedge Fund Index rose 10.53% (aided by the slump in the U.S. dollar); the Morningstar Convertible Arbitrage Hedge Fund Index grew by 10.00%; the Morningstar Distressed Securities Hedge Fund Index was up 8.68%; the Morningstar Debt Arbitrage Hedge Fund Index appreciated by 8.52%; and the Morningstar MSCI Specialist Credit Index gained 7.45%.

At the bottom of the totem pole for single-strategy hedge funds were those funds designed to have limited responsiveness to either the stock or bond markets. The Morningstar MSCI Relative Value Hedge Fund Index grew by 6.36% and the Morningstar Equity Arbitrage Hedge Fund Index rose 4.07%, good results for indexes that are designed to hedge away most systematic equity exposure, Morningstar said.

The Morningstar Global Non Trend Hedge Fund Index grew by 3.43%. Its counterpart, the Global Trend Hedge Fund Index, was buffeted by a decidedly choppy climate for commodities pricing, and lost 0.53%. Finally, the Morningstar Short Equity Index had a surprising gain in the quarter, 2.00%.

The quarter was not only the largest absolute gain for the Morningstar Hedge Fund Index 1000, but it also represented that single-strategy index’s greatest quarterly victory over the Morningstar Hedge Fund of Funds Index. At 6.22%, the Hedge Fund of Funds Index lagged the MHFI 1000 by more than 300 basis points, as hedge funds of funds suffered from having adopted very conservative positions during the rocky first quarter of 2009. In contrast, the Morningstar Multi-Strategy Hedge Fund Index just about kept pace with the MFHI 1000, picking up 9.09%.