Hedge Funds See Negative First Quarter

A Morningstar press release said the index’s rebound in February of 2.43% was insufficient to cover losses incurred in January (-2.38%) and March (-1.50%), resulting in the worst quarterly performance in almost four years. “Lack of liquidity and economic uncertainty negatively impacted almost all hedge funds,” said Nadia Van Dalen, Morningstar hedge fund analyst, in the release.

Among Morningstar’s 17 hedge fund category indexes, equity-focused hedge funds bore the brunt of the economic damage, especially emerging-markets and U.S. small-cap equity hedge fund indexes, which lost 8.58% and 8.70%, respectively. However, these losses were half that of the S&P 500 and MSCI AC Asia Indexes.

Europe equity funds managed a small gain for the quarter of 0.53%, while the MSCI Europe Index lost 9.18%.

Trend-following hedge funds were the clear winners in the first quarter, gaining 9.77%. Morningstar said the returns can be attributed to the runup in commodities such as energy, metals, and agriculture, as uncertainty led investors to pour assets into this sector. Non-trend macroeconomic funds also ended up 2.04% for the quarter.

Equity arbitrage funds benefited from volatility in the market, as the Morningstar Equity Arbitrage Hedge Fund Index returned 2.78%. However, the Morningstar Convertible Arbitrage Hedge Fund Index lost 1.89% in the first quarter of 2008.

Debt arbitrage funds suffered as spreads continued to widen across the credit spectrum. The Morningstar Debt Arbitrage Hedge Fund Index lost 3.12% in the first quarter of 2008. Rate cuts in the U.S. and the U.K. resulted in the Morningstar Global Debt Hedge Fund Index eking out a 0.11% gain, significantly underperforming the Lehman Brothers Global Aggregate Index.

Distressed securities hedge funds lost 3.14%, while the Morningstar Corporate Actions Hedge Fund Index lost 2.86%.

The Morningstar Hedge Fund of Fund and Multi-Strategy Indexes lost 1.52% and 1.54%, respectively.

Morningstar launched the Index in February (See  Morningstar Unveils Hedge Fund Ratings ) and has approximately 8,700 hedge funds and funds of hedge funds in its database. More information is at www.morningstar.com .