Key Takeaways
- • The Morningstar MSCI Composite AW Hedge Fund Index rose 0.9% in December 2013, tracking gains in global equities, with the MSCI World NR index climbing 2.1% over the same period.
- • Emerging markets hedge funds recovered from November losses, with the Morningstar MSCI Emerging Markets Hedge Fund Index gaining 0.8% in December and 3.7% for the full year 2013, significantly outperforming the unhedged MSCI Emerging Markets Index, which declined 2.6% annually.
- • Hedge fund managers successfully repositioned exposures in December after being caught off-guard by rising U.S. interest rates and falling emerging market stocks in November, pivoting allocations away from BRICS markets into frontier markets including the Middle East.
- • Hedge funds specializing in emerging markets delivered substantially stronger returns than traditional equity exposure, with the hedged emerging markets index outperforming its unhedged counterpart by 6.3 percentage points for the year ended December 2013.
- • Bond markets faced headwinds in December as the Barclays Global Aggregate TR bond index fell 0.6%, reflecting upward pressure on U.S. and European interest rates during the month.
Summary
Hedge funds posted solid December returns as managers capitalized on repositioning opportunities created by November market turbulence, according to Morningstar's latest performance analysis. The Morningstar MSCI Composite AW Hedge Fund Index, which tracks nearly 1,000 asset-weighted hedge funds, gained 0.9% in December, moving in tandem with broader equity market strength. The MSCI World NR global stock index advanced 2.1% over the same period, while fixed income markets weakened, with the Barclays Global Aggregate TR bond index declining 0.6% due to rising interest rates in both the United States and Europe.
The standout performance came from emerging markets hedge funds, which recovered lost ground after underperforming in November. A.J. D'Asaro, fund analyst at Morningstar, noted that hedge fund managers who were surprised by elevated U.S. interest rates and declining emerging market equities in the prior month "were able to reposition themselves and deliver gains in December." The Morningstar MSCI Emerging Markets Hedge Fund Index rose 0.8% in December, driven in part by tactical allocation shifts away from BRICS markets toward frontier market opportunities, particularly in the Middle East, which exhibited stronger performance during the month.
For the full year 2013, the performance divergence between hedged and unhedged emerging markets exposure was pronounced. The Morningstar MSCI Emerging Markets Hedge Fund Index climbed 3.7% for the year, while the unhedged MSCI Emerging Markets Index declined 2.6%—a 6.3 percentage point outperformance gap. This substantial differential underscores the value of active management and portfolio hedging strategies during a year marked by emerging market volatility and currency headwinds. Morningstar's analysis confirms that hedge funds "strongly outperformed" traditional buy-and-hold emerging market indices, demonstrating the benefit of active repositioning and risk management during periods of market dislocation.
The standout performance came from emerging markets hedge funds, which recovered lost ground after underperforming in November. A.J. D'Asaro, fund analyst at Morningstar, noted that hedge fund managers who were surprised by elevated U.S. interest rates and declining emerging market equities in the prior month "were able to reposition themselves and deliver gains in December." The Morningstar MSCI Emerging Markets Hedge Fund Index rose 0.8% in December, driven in part by tactical allocation shifts away from BRICS markets toward frontier market opportunities, particularly in the Middle East, which exhibited stronger performance during the month.
For the full year 2013, the performance divergence between hedged and unhedged emerging markets exposure was pronounced. The Morningstar MSCI Emerging Markets Hedge Fund Index climbed 3.7% for the year, while the unhedged MSCI Emerging Markets Index declined 2.6%—a 6.3 percentage point outperformance gap. This substantial differential underscores the value of active management and portfolio hedging strategies during a year marked by emerging market volatility and currency headwinds. Morningstar's analysis confirms that hedge funds "strongly outperformed" traditional buy-and-hold emerging market indices, demonstrating the benefit of active repositioning and risk management during periods of market dislocation.
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