Key Takeaways
- • Morningstar's MSCI Composite Hedge Fund Index gained 6.3% over the trailing 12 months through January 2013, with nearly all hedge fund categories posting positive returns for 2012 excluding short bias and systematic trading strategies.
- • January 2013 marked a strong month for hedge funds, with the composite index rising 1.9%, driven by reduced global economic and political uncertainty and a broad appetite for risk assets; the S&P 500 climbed 5.2% for the month.
- • Long-short equity hedge funds outperformed during January, with the MSCI North America Hedge Fund Index up 2.3%, while the Russell 2000 jumped 6.3% and the MSCI Small Cap Hedge Fund Index advanced 3.9%.
- • Risk-sensitive strategies delivered the strongest performance in January, while fixed-income strategies declined as widespread investor optimism shifted capital to higher-yielding assets; emerging markets hedge funds gained 3% amid positive economic data from China.
- • Investor redemptions accelerated during late 2012, with single-manager funds experiencing $4.7 billion in outflows during December alone—the fourth consecutive month of outflows—representing more than half of the $7 billion in total redemptions from the Morningstar database during the full year 2012.
Summary
Hedge funds delivered solid returns in 2012 according to Morningstar data released in March 2013, with broad-based gains across most strategy categories despite persistent investor redemptions late in the year. The Morningstar MSCI Composite Hedge Fund Index advanced 6.3% over the trailing 12-month period, with only short bias and systematic trading strategies posting declines. The index continued its positive momentum into January 2013, rising 1.9% as reduced global economic and political uncertainty sparked renewed investor appetite for risk assets.
According to Philip Guziec, alternative investing strategist at Morningstar, the January rally was characterized by a decisive shift toward riskier positions. "Reduced global economic and political uncertainty during January fueled a broad increase in appetite for risky assets," Guziec stated. "Excluding the short biased category, all hedge fund strategies were up for the month, and the most risk-sensitive strategies posted the strongest performance." The month's gains were concentrated early, with a two-day equity market rally driving the bulk of the S&P 500's 5.2% monthly advance.
Regional and category-specific performance varied significantly. Long-short equity strategies, captured in the MSCI North America Hedge Fund Index, gained 2.3% in January, while the broader equity market, as measured by the Russell 2000, surged 6.3%. Small-cap focused hedge funds followed closely with a 3.9% gain. Emerging markets hedge funds benefited from positive macroeconomic signals, particularly from China, rising 3% during the month. Conversely, less risky fixed-income strategies declined as widespread investor optimism pulled capital toward higher-yielding opportunities; however, high-yield and relative-value hedge fund strategies posted gains.
The performance gains masks an underlying redemption trend that accelerated during the second half of 2012. Single-manager funds within Morningstar's hedge fund database experienced $4.7 billion in outflows during December 2012 alone, marking the fourth consecutive month of net outflows. These December redemptions represented more than half of the $7 billion in total withdrawals investors made from hedge funds in the database throughout 2012—a sharp reversal from the inflow environment of prior years, when funds received $17.9 billion in 2011 and $10 billion in 2010.
According to Philip Guziec, alternative investing strategist at Morningstar, the January rally was characterized by a decisive shift toward riskier positions. "Reduced global economic and political uncertainty during January fueled a broad increase in appetite for risky assets," Guziec stated. "Excluding the short biased category, all hedge fund strategies were up for the month, and the most risk-sensitive strategies posted the strongest performance." The month's gains were concentrated early, with a two-day equity market rally driving the bulk of the S&P 500's 5.2% monthly advance.
Regional and category-specific performance varied significantly. Long-short equity strategies, captured in the MSCI North America Hedge Fund Index, gained 2.3% in January, while the broader equity market, as measured by the Russell 2000, surged 6.3%. Small-cap focused hedge funds followed closely with a 3.9% gain. Emerging markets hedge funds benefited from positive macroeconomic signals, particularly from China, rising 3% during the month. Conversely, less risky fixed-income strategies declined as widespread investor optimism pulled capital toward higher-yielding opportunities; however, high-yield and relative-value hedge fund strategies posted gains.
The performance gains masks an underlying redemption trend that accelerated during the second half of 2012. Single-manager funds within Morningstar's hedge fund database experienced $4.7 billion in outflows during December 2012 alone, marking the fourth consecutive month of net outflows. These December redemptions represented more than half of the $7 billion in total withdrawals investors made from hedge funds in the database throughout 2012—a sharp reversal from the inflow environment of prior years, when funds received $17.9 billion in 2011 and $10 billion in 2010.
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