Key Takeaways
- • Morningstar's MSCI Composite Hedge Fund Index delivered 6.3% returns over the trailing 12 months through January 2013, with January alone posting a 1.9% gain as reduced global economic uncertainty boosted risk appetite across strategies.
- • Only two hedge fund categories declined during the 12-month period: short bias and systematic trading strategies, while all other strategy categories posted positive returns, with risk-sensitive strategies outperforming most notably.
- • The MSCI North America Hedge Fund Index (primarily long-short equity funds) rose 2.3% in January, while emerging markets hedge funds gained 3% driven by positive economic data from China on GDP and export growth.
- • Hedge funds experienced significant investor redemptions in 2012, with single-manager funds seeing $4.7 billion in outflows during December alone—the fourth consecutive month of outflows and representing more than half of the $7 billion total withdrawn from the Morningstar database during the full year.
- • Fixed-income hedge fund strategies underperformed in January due to widespread investor optimism shifting capital toward equities, while high-yield and relative-value strategies posted gains as risk appetite normalized.
Summary
Hedge funds demonstrated solid performance throughout 2012 and into early 2013, according to Morningstar data released in March 2013. The Morningstar MSCI Composite Hedge Fund Index advanced 6.3% during the 12-month trailing period and posted a 1.9% gain specifically in January 2013. This broad-based strength reflected a significant shift in market dynamics, as Philip Guziec, alternative investing strategist at Morningstar, noted that "reduced global economic and political uncertainty during January fueled a broad increase in appetite for risky assets."
Performance across strategy categories remained largely positive throughout the period. Almost all Morningstar MSCI hedge fund indexes rose in January, with only short bias and systematic trading categories showing declines over the full 12-month measurement window. Risk-sensitive strategies posted the strongest January performance as investors rotated back into equities. The MSCI North America Hedge Fund Index, which primarily comprises long-short equity funds, gained 2.3% in January. The MSCI Small Cap Hedge Fund Index rose 3.9%, while the MSCI Emerging Markets Hedge Fund Index surged 3% driven by positive economic news from China regarding GDP and export figures. By contrast, less risky fixed-income strategies declined in January as widespread investor optimism prompted capital shifts away from defensive positions, though high-yield and relative-value hedge fund strategies captured gains from the risk-on environment.
However, underlying capital flows told a more cautious story. Single-manager hedge funds within Morningstar's database experienced $4.7 billion in outflows during December 2012 alone, marking the fourth consecutive month of net withdrawals. This December exodus represented more than half of the $7 billion that investors pulled from hedge funds in the Morningstar database during the entire 2012 calendar year. The 2012 redemption pattern marked a sharp reversal from investor behavior in 2011 and 2010, when the same database recorded inflows of $17.9 billion and $10 billion respectively, highlighting a shift in institutional and retail investor sentiment toward alternative strategies despite the asset class's improving return profile.
Performance across strategy categories remained largely positive throughout the period. Almost all Morningstar MSCI hedge fund indexes rose in January, with only short bias and systematic trading categories showing declines over the full 12-month measurement window. Risk-sensitive strategies posted the strongest January performance as investors rotated back into equities. The MSCI North America Hedge Fund Index, which primarily comprises long-short equity funds, gained 2.3% in January. The MSCI Small Cap Hedge Fund Index rose 3.9%, while the MSCI Emerging Markets Hedge Fund Index surged 3% driven by positive economic news from China regarding GDP and export figures. By contrast, less risky fixed-income strategies declined in January as widespread investor optimism prompted capital shifts away from defensive positions, though high-yield and relative-value hedge fund strategies captured gains from the risk-on environment.
However, underlying capital flows told a more cautious story. Single-manager hedge funds within Morningstar's database experienced $4.7 billion in outflows during December 2012 alone, marking the fourth consecutive month of net withdrawals. This December exodus represented more than half of the $7 billion that investors pulled from hedge funds in the Morningstar database during the entire 2012 calendar year. The 2012 redemption pattern marked a sharp reversal from investor behavior in 2011 and 2010, when the same database recorded inflows of $17.9 billion and $10 billion respectively, highlighting a shift in institutional and retail investor sentiment toward alternative strategies despite the asset class's improving return profile.
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