Hedge Fund Performance Drops in Q2

August 21, 2006 (PLANSPONSOR.com) - The overall performance of the MSCI Hedge Fund Composite Index dropped to 0.1% for the second quarter of 2006, compared to 5.3% in the previous quarter.

According to an MSCI Barra news release, its hedge fund index outperformed equities and underperformed fixed income in the second quarter. The MSCI World Equity Index declined 0.5% and the MSCI World Sovereign Debt Index gained 3.2%.

Funds in the MSCI Hedge Fund Composite Index that invest mainly in Developed Markets continue to dominate both in terms of number of funds and invested assets, making up more than 82%, the news release said. Developed Markets funds returned 1.4% in the second quarter. Funds focusing on Emerging Markets, as depicted by the MSCI Emerging Markets Hedge Fund Composite Index, generally underperformed funds focusing on Developed Markets during the second quarter of 2006 – a reversal from last quarter’s results.

Over the last quarter, small-cap focused funds returned -1.82%, while the mid- and large-cap focused funds returned -1.7%. Over the past year, small-cap focused funds outperformed the funds investing in mid- and large caps with returns of 14.67% compared to 13.99%.

Additionally, for the second quarter of 2006, Short Bias managers in the MSCI Hedge Fund Composite Index have been the best performing strategy with a return of 6.6%, and Long Bias funds in the MSCI Hedge Fund Composite Index were the worst with a return of -2.0%. However, the MSCI Short Bias Index turned in the worst performance over the past one-, three-, and five-year periods while the Distressed Securities Index stands out as the best performing hedge fund strategy in each of the three-year and five-year periods.

Over the quarter larger funds outperformed smaller funds in the MSCI Hedge Fund Composite Index. The MSCI Small Funds Index returned -0.12%, while the MSCI Core Fund Index returned 0.32%. Over the past three years however, the smaller funds have outperformed larger funds by 9.38% and 9.28%, respectively.