Key Takeaways
- • Hedge funds trailed traditional asset classes in Q3 2006, with the MSCI Hedge Fund Composite Index returning 0.5%, against 4.5% for the MSCI World Equity Index and 1.5% for the MSCI World Sovereign Debt Index.
- • Over the longer window from December 2000 to September 2006, the hedge fund index outperformed both benchmarks on an annualized basis.
- • Hedge funds drew $5.8 billion in net inflows in the quarter, bringing year-to-date inflows to $31.5 billion.
- • Relative Value strategies led flows with a $2.6 billion inflow in the quarter, while Security Selection strategies saw a $384 million outflow.
- • Small funds ($15–100 million) outperformed larger funds (over $100 million) over five years, returning 8.61% against 7.84% annualized.
Summary
Hedge funds underperformed both equities and fixed income in the third quarter of 2006, according to the MSCI Hedge Fund Composite Index, which returned 0.5%. Over the same period, the MSCI World Equity Index gained 4.5% and the MSCI World Sovereign Debt Index rose 1.5%, as reported by Family Wealth Report.
The picture looks different over a longer horizon. From December 2000 through September 2006, the hedge fund index outperformed both the MSCI World Sovereign Debt Index and the MSCI World Equity Index on an annualized basis, the report noted.
Capital continued to flow into the sector. Assets in funds tracked by the MSCI Hedge Fund Composite Index rose by a net $5.8 billion in the quarter, lifting the year-to-date total to $31.5 billion. The MSCI Relative Value Index attracted the largest inflow, at $2.6 billion in the quarter. The MSCI Security Selection Index, by contrast, recorded a net outflow of $384 million.
Fund size and strategy also shaped results. Over the past five years, small funds ($15–100 million) returned 8.61% on an annualized basis, compared with 7.84% for funds managed above $100 million. The trend held in the third quarter, when the MSCI Small Funds Index returned 0.58% and the MSCI Core Fund Index returned 0.44%.
By strategy, the MSCI Relative Value Index posted the strongest third-quarter return at 1.7%, while the MSCI Directional Trading Index had the weakest at minus 1.2%. On a year-to-date basis, the report cited the MSCI Security Selection Index as the top performer with a 9.2% return, and the MSCI Directional Trading Index as the weakest at 6.5%.
The picture looks different over a longer horizon. From December 2000 through September 2006, the hedge fund index outperformed both the MSCI World Sovereign Debt Index and the MSCI World Equity Index on an annualized basis, the report noted.
Capital continued to flow into the sector. Assets in funds tracked by the MSCI Hedge Fund Composite Index rose by a net $5.8 billion in the quarter, lifting the year-to-date total to $31.5 billion. The MSCI Relative Value Index attracted the largest inflow, at $2.6 billion in the quarter. The MSCI Security Selection Index, by contrast, recorded a net outflow of $384 million.
Fund size and strategy also shaped results. Over the past five years, small funds ($15–100 million) returned 8.61% on an annualized basis, compared with 7.84% for funds managed above $100 million. The trend held in the third quarter, when the MSCI Small Funds Index returned 0.58% and the MSCI Core Fund Index returned 0.44%.
By strategy, the MSCI Relative Value Index posted the strongest third-quarter return at 1.7%, while the MSCI Directional Trading Index had the weakest at minus 1.2%. On a year-to-date basis, the report cited the MSCI Security Selection Index as the top performer with a 9.2% return, and the MSCI Directional Trading Index as the weakest at 6.5%.
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