Hedge Funds Post Puny Profits


NEW YORK (MainStreet) — Hedge fund managers finally got a break – a meager return. The Morningstar composite of nearly 1,000 hedge funds rose 1.1% in July, bringing year-to-date returns to a modest 4.0%.


"Most hedge fund strategies notched gains in July following June's decline, but developed markets equity strategies were clear winners," says AJ D'Asaro, fund analyst at Morningstar. "The Morningstar MSCI Developed Markets Hedge Fund Index advanced 2.0% in July, extending its year-to-date increase to 6.4% as Europe and Japan showed signs of a turnaround and U. S. interest rates stabilized."


The North America hedge fund index led world regions for the second straight month with a 2.5% increase.

Domestic small-caps have been the top performing hedge fund sector for the past 12 months, seeing a 19.8% gain. And they continued that momentum as the small-cap hedge fund index rose 3.3% in July, marking a 12.0% return for the year so far. However, modified engines are not winning the race. The unhedged Russell 2000 Index surged 7.0% in July, up 24.0% for the year to date and lapping the field with a whopping 35.0% return for the trailing 12 months.

Black box investing is not outperforming plain vanilla equity plays overseas, either. While the unhedged MSCI Europe index soared 7.4% in July and has tallied a 9.7% gain for the year to date, European focused hedge funds are on a slow boat, climbing just 1.6% for the month while up 5.7% for the year to date.

But hedging emerging market stocks has helped mitigate losses for that soured sector. The Morningstar MSCI Emerging Markets Hedge Fund Index, inched up only 0.7% in July and posts a meager 2.7% return for the year to date – still better than the straight-play MSCI Emerging Markets Index, which was up 1.0% in July but still faces a -8.6% loss for the year to date.

Debt-oriented hedge fund strategies began to edge up as the 10-year U.S. Treasury note yield stabilized at 2.6%. The Morningstar MSCI Fixed Income Hedge Fund Index rose by 0.5% in July and has posted a 2.1% gain for the year to date. The Morningstar MSCI Fixed Income Arbitrage Hedge Fund Index increased 0.6% in July and 0.9% for the year to date. In contrast, the Barclays U.S. Aggregate Bond Index advanced by 1.3% in July and fell 3.6% for the year to date.

Net new money is still hard for hedgers to find. Morningstar reports no hedge fund category received significant inflows during the month. In June, single-manager hedge funds in Morningstar's database saw net outflows of $851 million. But multistrategy hedge funds experienced the largest net outflows for the month with $1.4 billion finding the door. Systematic trading strategies, which have been a sucker play for two years, saw net outflows of $267 million in June.

--Written by Hal M. Bundrick for MainStreet

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