Key Takeaways
- • The Morningstar MSCI Composite Hedge Fund Index declined 2.4% in August 2011, marking the largest monthly loss of the year amid U.S. debt downgrade concerns and recession fears, though still outperforming the S&P 500's 5.4% decline.
- • Regional divergence was pronounced: the Europe Hedge Fund Index fell 4.5% (versus the MSCI Europe Index's 10% drop), while Asia-Pacific and emerging markets indexes declined 4.6% and 3.4% respectively.
- • Defensive strategies proved resilient—relative-value funds lost only 1.2% and merger arbitrage declined just 0.2%—while convertible arbitrage fell 1.2%, demonstrating the protective value of hedged positions during equity market turbulence.
- • Asset flows through July showed mixed sentiment: single-manager funds attracted $1.6 billion in new capital and global macro funds added $2.3 billion, while fund-of-funds experienced $788 million in outflows and U.S. long/short equity strategies recorded the heaviest outflows at $575 million.
- • Volatility reached a two-year peak in August, reflecting broader market anxiety surrounding the U.S. fiscal crisis and double-dip recession concerns that drove the composite hedge fund index to post its worst monthly performance of 2011.
Summary
Hedge funds experienced their most significant monthly decline of 2011 in August as equity market turmoil intensified following the U.S. debt downgrade and escalating concerns about a potential double-dip recession. According to Terry Tian, alternative investments analyst for Morningstar, the Morningstar MSCI Composite Hedge Fund Index—an asset-weighted composite tracking just under 1,000 hedge funds—fell 2.4% for the month. Despite the sharp decline, the index materially outperformed broader equity benchmarks, with the S&P 500 declining 5.4% and volatility hitting a two-year peak during the period.
Regional performance varied significantly, with European hedge funds experiencing the steepest relative losses. The Morningstar MSCI Europe Hedge Fund Index dropped 4.5%, substantially underperforming the broader composite index, yet still significantly outpacing the MSCI Europe Index's 10% plunge as financial system concerns mounted across the region. Asia-Pacific hedge funds declined 4.6%, while emerging markets-focused strategies fell 3.4%, indicating that developed-market hedging strategies provided meaningful downside protection as risk aversion spread globally.
Strategy-specific performance highlighted the defensive characteristics of certain hedge fund approaches. Relative-value strategies demonstrated resilience, declining only 1.2% as their structural hedges against equity market risk proved effective. Merger arbitrage funds performed even better, posting a minimal 0.2% decline, while convertible arbitrage strategies fell 1.2%—underscoring that capital-structure-focused approaches provided better protection than traditional equity long/short positions during the period of elevated market stress.
Asset flows through July revealed investor sentiment shifts, with single-manager funds capturing $1.6 billion in inflows and global macro strategies attracting $2.3 billion. However, fund-of-funds structures experienced $788 million in outflows, and U.S.-focused strategies faced material redemptions, with long/short equity and long/short debt registering outflows of $575 million and $572 million respectively. These flow patterns suggested that investors were reallocating capital away from traditional fund structures toward strategies and managers perceived to offer superior downside protection during periods of market turbulence.
Regional performance varied significantly, with European hedge funds experiencing the steepest relative losses. The Morningstar MSCI Europe Hedge Fund Index dropped 4.5%, substantially underperforming the broader composite index, yet still significantly outpacing the MSCI Europe Index's 10% plunge as financial system concerns mounted across the region. Asia-Pacific hedge funds declined 4.6%, while emerging markets-focused strategies fell 3.4%, indicating that developed-market hedging strategies provided meaningful downside protection as risk aversion spread globally.
Strategy-specific performance highlighted the defensive characteristics of certain hedge fund approaches. Relative-value strategies demonstrated resilience, declining only 1.2% as their structural hedges against equity market risk proved effective. Merger arbitrage funds performed even better, posting a minimal 0.2% decline, while convertible arbitrage strategies fell 1.2%—underscoring that capital-structure-focused approaches provided better protection than traditional equity long/short positions during the period of elevated market stress.
Asset flows through July revealed investor sentiment shifts, with single-manager funds capturing $1.6 billion in inflows and global macro strategies attracting $2.3 billion. However, fund-of-funds structures experienced $788 million in outflows, and U.S.-focused strategies faced material redemptions, with long/short equity and long/short debt registering outflows of $575 million and $572 million respectively. These flow patterns suggested that investors were reallocating capital away from traditional fund structures toward strategies and managers perceived to offer superior downside protection during periods of market turbulence.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.