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CHICAGO, May 24, 2012—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today reported preliminary hedge fund performance for April as well as estimated asset flows through March 2012. The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar database, inched up 0.2% in April, outpacing most major equity indexes during the month. The MSCI World Stock Market Index, by comparison, declined 1.1%.
"After a strong first-quarter rally, equity markets across the globe hit a bump in April," said Mallory Horejs, alternative investments analyst at Morningstar. "Hedge fund performance was mixed, with arbitrage and fixed-income strategies posting the highest gains."
Employment and economic growth reports in the United States, while continuing to signal growth, were more muted than during the first quarter of 2012. After three straight months of large gains for U.S. equities, the SandP 500 Index declined 0.6% in April, while the Morningstar MSCI North America Hedge Fund Index slipped 0.4%. Smaller-capitalization strategies experienced greater headwinds, with the Morningstar MSCI Small Cap Hedge Fund Index and Russell 2000 Index falling 1.0% and 1.5%, respectively. As renewed economic fears drove investors away from equities, short-sellers delivered the month's best performance--the Morningstar MSCI Short Bias Hedge Fund Index jumped 1.7%.
Economic data in Asia also suggested decelerating growth, particularly in China, where export and import growth rates in April declined substantially from earlier this year. The Morningstar MSCI Asia Pacific Hedge Fund Index dropped 0.7%, but sheltered investors from the MSCI AC Asia Stock Market Index's 1.4% fall.
European-focused hedge funds provided even greater downside protection in April as the Morningstar MSCI Europe Hedge Fund Index managed to end the month flat. The MSCI Europe NR Index, on the other hand, sank 2.3% during the month, as election uncertainty and recessionary fears continued to plague countries across the region. The sovereign debt crisis also regained steam when Standard and Poor's downgraded Spain's credit rating to the same level as fiscally troubled states Ireland and Italy.
Fundamentally driven macroeconomic hedge fund strategies also struggled to deliver in April, as currency and commodities markets failed to exhibit strong trends. Soybean prices fell at month-end after reaching new multiyear highs, and gold suffered several sharp reversals. The Morningstar MSCI Discretionary Trading Hedge Fund Index dropped 1.3%. Systematic trend-following strategies fared better, however, and the Morningstar MSCI Systematic Trading Hedge Fund Index posted a 0.1% increase.
Despite this shakiness across equity, currency, and commodity markets, most relative-value strategies managed to stay afloat in April. The Morningstar MSCI Arbitrage Hedge Fund Index, which includes funds that attempt to exploit anomalies in price spreads between related or similar instruments, rose 0.5%.
Fixed-income strategies overall delivered the best performance, as cautious investors flocked to safe-haven assets. The Morningstar MSCI Fixed Income Arbitrage Hedge Fund Index climbed 1.3%. The Morningstar MSCI Specialist Credit Hedge Fund Index, which includes funds that seek exposure to credit-sensitive issuers, increased 0.6%, just short of the Barclays U.S. Corporate High Yield Index's 1.0% rise. Long/short credit strategies benefited from the continued rally in both high-yield bonds and the leveraged loan market; the Morningstar MSCI Long-Short Credit Hedge Fund Index rose 0.8%.
Hedge funds in Morningstar's database experienced another month of net outflows in March, leaking $655 million overall. This marks the fourth consecutive month of outflows, although the magnitude of the flows appears to be subsiding somewhat, as figures from the previous months were all well above $1 billion. Global macro strategies suffered the largest redemptions, leaking $786 million in March and more than $2.0 billion overall for the first quarter of 2012. Funds in the U.S. long/short equity category also struggled, as investors pulled out $482 million in March. The long/short debt and long-only debt categories enjoyed the largest inflows, receiving $394 and $374 million, respectively. These investments were well-timed as fixed-income-oriented strategies outperformed in April.
Funds of hedge funds in Morningstar's database continued to experience outflows, leaking $1.7 billion in March. Investors instead demonstrated a preference for single-manager multistrategy funds, which received $160 million in inflows in March.
April returns for the Morningstar MSCI Hedge Fund Indexes and March asset flows are based on funds that reported as of May 15, 2012. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar DirectSM, the company’s global research platform for institutions.
Morningstar has approximately 11,000 hedge funds and funds of hedge funds in its database. Morningstar calculates hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstar’s hedge fund database. These indexes demonstrate the performance of hedge funds to investors who have hedged their currency exposure back into U.S. dollars. The MSCI Hedge Fund Index Methodology classifies hedge funds by investment process, geography, and asset class. These indexes are not investible.
This release is not intended to be an offer or solicitation for the sale of hedge funds. The information is not warranted to be accurate, complete, or timely. When considering hedge funds, investors should consider various risks, including the fact that some products engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager. The high degree of leverage that is often obtainable in trading can lead to large losses as well as gains. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 380,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 8 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has more than $190 billion in assets under advisement and management as of March 31, 2012. The company has operations in 27 countries.