Morningstar Reports Hedge Fund Performance for September, Asset Flows Through August

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Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, has reported preliminary hedge fund performance for September 2011 as well as asset flows through August. The Morningstar MSCI Composite Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar hedge fund database, fell 2.3% for the month of September, compared to a decline of 8.6% for the MSCI World NR Stock Index.

“Hedge funds did their job," said Josh Charney, alternative investments analyst at Morningstar. “While hedge funds generally followed the market down during the economic turmoil of September, on average they didn’t fall far. Some categories even posted positive results.”

European and Asian equity-focused hedge funds in the Morningstar database were among the largest losers in September, but these funds declined much less than their market benchmarks. The Morningstar MSCI Europe and the Morningstar MSCI Asia Pacific Hedge Fund Indexes fell 5.9% and 3.3 %, respectively, while the MSCI AC Asia and MSCI Europe Stock Indexes dove 7.9% and 11.0%, respectively. September marked the end of the worst quarterly performance for the Morningstar MSCI Europe Hedge Fund Index since its 1998 inception—an 8.5% drop. Similarly, the Morningstar MSCI Asia Pacific Hedge Fund Index slumped 8.4% in the third quarter, its worst quarterly performance in three years. Chinese equities tanked over slowing economic growth concerns and Australian stocks pulled back as commodities plunged.

While there were few bright spots in September, two hedge fund indexes managed to post positive numbers for the month. The Morningstar MSCI Short Bias Hedge Fund Index, which tracks bearish hedge funds, increased 10.4% due to its negative market exposure. The Morningstar MSCI Currency Hedge Fund Index eked out a 0.7% rise, as some funds in this index profited from a rising U.S. dollar.

The Morningstar MSCI Directional Trading Hedge Fund Index, which contains funds that take systematic directional bets on price trends in liquid derivatives, also benefited from a rising U.S. dollar. In addition, these funds took advantage of the rise in U.S. Treasury bonds fueled by the Federal Reserve's Operation Twist and investors' rush to safe-haven assets in September.

Higher-risk equity markets performed relatively poorly in September. The Morningstar MSCI Emerging Markets Hedge Fund Index declined 6.8% on renewed fears of a global contraction and a sharp drop in commodity prices. Smaller companies, which tend to perform more poorly in downturns, also exhibited notably weak performance—the Morningstar MSCI Small Cap Hedge Fund Index fell 7.3% in September and 13.8% over the third quarter.


Event-driven strategies such as merger arbitrage and distressed securities also struggled in September amidst falling equity valuations. The Morningstar MSCI Event-Driven Hedge Fund Index plummeted 5.1%, its largest monthly decline since September of 2008. Credit market spreads also widened during September. The Morningstar MSCI Long-Short Credit Index fell 1.3% in September and 4.2% for the third quarter.


Although the third quarter was difficult for most hedge fund categories, investors continued to pour money in to hedge funds in Morningstar's database through August. Total inflows during August for all single hedge fund strategies totaled $625 million, the sixth-straight month of inflows. Systematic futures hedge funds in the database netted the most inflows in August, $328 million in total, while Morningstar's global macro hedge fund category was hardest hit by outflows, totaling about $456 million. For the year-to-date through August, investors added almost $19 billion to single-manager hedge funds in the database, despite the fact that the average hedge fund, as measured by the Morningstar MSCI Composite Hedge Fund Index was down 3.9% year to date through September.


Funds of funds in Morningstar's database, on the other hand, experienced their third-consecutive month of outflows, leaking $108 million in August. Investors have pulled $2.3 billion from funds of funds for the year to date through August.


September returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of October 17, 2011. August asset flows are based on funds that reported as of October 20, 2011. Hedge fund investors, managers, consultants, and advisors can access additional information through the Morningstar® Alternative Investment CenterSM, formerly Morningstar® AltvestSM, the company’s research platform designed specifically for hedge funds, or 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.