MSCI Hedge Fund Index Comes Back to Life in Q3

November 15, 2005 ( - The MSCI Hedge Fund Composite Index returned 4.3% in the third quarter of 2005 - a significant advance over the second quarter's 0.9% gain, according to MSCI data.

An MSCI news release said that the MSCI World Equity Index rose 7% and the MSCI World Sovereign Debt Index declined 1.1%.  

At the end of Q3, asset flows were positive in general with the exception of relative value funds. In a continuation of the first two quarters, relative value funds were the sole process group with overall asset outflows.   The greatest inflows were led by Long Bias funds within the MSCI Security Selection process group. Overall, however, positive asset flows into hedge funds in the MSCI Hedge Fund Composite Index have slowed substantially in 2005 relative to the previous two years.

Down 3%, Convertible Arbitrage funds turned in the worst performance over the past 12 months and have also had the largest capital withdrawals for funds in the MSCI Hedge Fund Composite Index. The Distressed Securities Index was the best performing strategy in each of the one year, three year and five year periods ending September 30, 2005.

EMEA funds in the MSCI Hedge Fund Composite Index produced the highest returns over both the last three and twelve months, with returns of 14.8% and 27.7% respectively, according to the news release. Continuing the trend from 2004, funds focusing on Emerging Markets outperformed funds focusing on Developed Markets and Global Markets.

In the third quarter of 2005, funds investing in Developed Markets, primarily North America, displayed the largest inflows, while those investing in Global Markets displayed the only overall outflow of the three geographical regions.  

During this period, within the Developed Markets region, funds in the MSCI Hedge Fund Composite Index investing solely in North America experienced the largest inflows while diversified funds suffered the largest outflows.   Funds investing in Pacific Ex Japan also suffered capital withdrawals.

All of the categories of funds in the MSCI Hedge Fund Composite Index investing in Emerging Markets recorded overall positive inflows during the third quarter, and diversified funds investing in Emerging Markets experienced the largest capital inflow.

A majority of funds in the MSCI Hedge Fund Composite Index (57%) continue to be invested in equities, but they only represented 45% of the total invested assets (compared to 41% at end of Q2 2005). Among hedge funds in the MSCI Hedge Fund Composite Index investing in equity, during the third quarter 54% invested broadly and did not focus on any market capitalization segment of the equity markets. Funds focused on small and mid-caps, and small-caps only represented 20% of such funds.

Funds in the MSCI Hedge Fund Composite Index focused on small caps outperformed those investing in large caps over the last one, three and five year periods. Over the last quarter, such small-cap focused funds returned 5.6%, while the mid and large cap focused funds returned 4.5%. Over the past year, such small cap focused funds outperformed the funds investing in mid and large caps with returns of 8.6% and 5.6% respectively.