MORNINGSTAR, INC. 
By Morningstar also calculates hedge fund indexes according to the MSCI methodology. The Morningstar with MSCI Asset Weighted Hedge Fund Composite index, which hedges U.S. dollar exposure, lost 12.9% in 2008, while the equally weighted version lost 16.4%, reflecting the poorer performance of the smaller funds.
Investors lost their appetite for hedge funds in 2008, as the vehicles intended to deliver absolute returns were forced to resort to relative claims of success. Since
"In 2008, hedge fund managers generally failed to deliver," said Morningstar Hedge Fund Analyst
Indeed, investors redeemed assets aggressively in 2008. Hedge fund inflows peaked in
High redemptions and little possibility of collecting performance fees in the near future, led hedge funds to shutter in record numbers in 2008. The number of funds dropping out of Morningstar's database increased more than 150% in 2008 from 2007 - 1,158 single-manager funds and 490 funds of funds were removed in 2008 compared to 434 single-manager funds and 208 funds of funds in 2007. (Funds are removed from Morningstar's database if the fund liquidates, if the manager wishes to stop reporting returns, or if funds fail to report returns for six months.)
Emerging market equities proved to be the worst strategy in 2008. Effectively a market-return strategy, these funds are only able to invest in stocks or hold cash, as shorting emerging markets holdings is very difficult. Emerging stock markets performed worse than other markets, as skittish investors pulled capital out of risky assets. Although emerging markets bounced back in December, the MSCI Emerging Markets Index lost almost 55% in 2008 while the Morningstar Emerging Market Equity Hedge Fund Index lost 45.6% in 2008 and 20.7% in the last quarter alone.
The ability to hedge helped the Morningstar with MSCI Developed Markets Hedge Fund Index, which lost only 11.9% in 2008. Of the developed market equities funds, Europe equity hedge funds fared the best on a relative basis. The Morningstar Europe Equity Hedge Fund Index beat the MSCI Europe stock index by about 30 percentage points in 2008. The Asian Equity Hedge Fund Index also outperformed the MSCI AC Asia Index by more than 19 percentage points. Late in the year, European and Asian hedge funds got some relief, as governments announced rate cuts and stimulus packages, boosting the equity markets.
The best-performing strategy this year was global trend following, a systematic strategy that tracks price trends in liquid derivatives such as futures, options, and currency forwards. The Morningstar Global Trend Hedge Fund Index gained 7.4% in the fourth quarter of 2008 and 9.8% for 2008 overall. In the first half of the year, these funds profited from an upward trend in commodities and a downward trend in the U.S. dollar, as uncertainty over the U.S. economy led to increased investment in "hard" assets. The third quarter saw a sharp reversal in these trends, catching global trend funds by surprise. But these funds recovered in the fourth quarter, as the drop in oil and the rise of the U.S. dollar sustained.
Global non-trend-following funds, which trade the same instruments as global trend funds but in a more discretionary manner, gained 0.9% in the fourth quarter, ending the year down 1.2% - less than every other losing category. These funds benefited from the liquidity of the instruments that they trade, enabling them to get in and out of the market quickly.
Convertible arbitrage funds took a big hit in 2008. The Morningstar Convertible Arbitrage Hedge Fund Index dropped 13.1% over the quarter and 24.9% over the year. In
Plagued by a similar fate, funds in the Morningstar Debt Arbitrage and Morningstar Global Debt Hedge Fund Indexes plunged 8.2% and 18.7%, respectively, in the last three months of the year, and 16.7% and 28.5%, respectively, in 2008, as investors fleeing to Treasuries caused credit spreads to widen to near-Depression-era levels in even investment-grade corporate bonds. Defaults on high-yield bonds rose to a record high in November, thereby squeezing the price of high-yield securities and sending the Morningstar Distressed Securities Hedge Fund Index down 16.1% for the fourth quarter, and 25.3% for the year. Hedge funds buying distressed assets early in the credit crunch saw their investments deteriorate even further alongside the economy.
Poor timing and illiquidity also took a toll on corporate actions funds. The Morningstar Corporate Actions Hedge Fund Index dropped 28.9% in 2008, including 13.2% for the final quarter. These value-seeking funds look for events such as privatizations, mergers and acquisitions, share repurchases, IPOs, and spin-offs to enhance share value, but such events proved scarce during the steep bear market. Tight credit, badly performing equity, and lack of institutional-investor demand turned the leveraged buyout boom, which peaked in mid-2007, to bust in 2008. This year also witnessed the collapse of a record number of merger and acquisition deals and a 50% drop in IPO activity. "The easy credit bubble burst, and along with it a great many hedge funds," Papagiannis added.
December returns and November asset flows for the Morningstar Hedge Fund Indexes are based on funds that reported as of
As announced in
Morningstar has approximately 8,400 hedge funds and funds of hedge funds in its database. The Morningstar 1000 Hedge Fund Index, a global, broadly representative benchmark for hedge fund performance, has return history from
This press release is not intended to be an offer or solicitation for the sale of hedge funds. The information is not warranted to be accurate, complete, or timely. When considering hedge funds, investors should consider various risks, including the fact that some products engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager. The high degree of leverage that is often obtainable in trading can lead to large losses as well as gains. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in
(C)2009 Morningstar Inc. All rights reserved.
Morningstar Hedge Fourth
Fund Index October November December Quarter Annual
Performance Return Return Return Return Return
December 2008 2008 2008 2008 2008 2008
------------------ ------- -------- -------- ------- -------
Morningstar 1000
HF PR USD -9.81 -2.53 2.05 -10.29 -22.15
Morningstar HF Of
Funds PR USD -9.39 -2.70 1.82 -10.23 -22.24
Morningstar Hedge
Fund Category Indexes
Morningstar Convtbl
Arbitrage HF PR USD -16.23 -2.17 6.01 -13.12 -24.91
Morningstar Corporate
Actions HF PR USD -11.24 -3.16 1.03 -13.15 -28.93
Morningstar Debt
Arbitrage HF PR USD -9.09 -0.26 1.29 -8.15 -16.73
Morningstar Distressed
Secs HF PR USD -9.12 -5.23 -2.58 -16.10 -25.30
Morningstar Dvlp Asia
Equity HF PR USD -8.71 -0.35 4.98 -4.50 -22.38
Morningstar EM
Equity HF PR USD -17.05 -4.59 0.15 -20.74 -45.62
Morningstar Equity
Arbitrage HF PR USD -4.32 -0.30 2.94 -1.81 -4.63
Morningstar Europe
Equity HF PR USD -9.87 -1.34 3.76 -7.74 -18.73
Morningstar Global
Debt HF PR USD -15.99 -4.21 1.04 -18.70 -28.47
Morningstar Global
Equity HF PR USD -12.79 -2.57 3.50 -12.06 -29.76
Morningstar Global
Non Trend HF PR USD -2.81 1.08 2.75 0.94 -1.21
Morningstar Global
Trend HF PR USD 3.34 0.80 3.13 7.42 9.82
Morningstar Multistrategy
HF PR USD -9.67 -2.68 0.96 -11.24 -21.75
Morningstar Short
Equity HF PR USD 5.81 -5.24 -1.02 -0.75 1.80
Morningstar US
Equity HF PR USD -11.23 -6.51 0.22 -16.82 -28.24
Morningstar US Small
Cap Eqty HF PR USD -14.10 -5.89 1.37 -18.05 -32.95
Morningstar Broad
Hedge Fund Category
Indexes
Morningstar Arbitrage
HF PR USD -8.27 -0.66 2.70 -6.41 -13.52
Morningstar
Equity HF PR USD -11.99 -3.72 2.12 -13.46 -29.82
Morningstar
Event HF PR USD -10.65 -4.04 0.02 -14.25 -27.04
Morningstar Global
Derivatives HF PR USD -0.42 0.97 2.89 3.45 4.40
Morningstar Hedge Fund
Indexes With MSCI
Morningstar HF Composit
Asset wght wMSCI -4.25 -0.74 0.50 -4.48 -12.91
Morningstar HF Composit
Equal wght wMSCI -5.61 -1.64 0.76 -6.45 -16.37
Geography
Morningstar HF Developed
Markets wMSCI -4.33 -1.66 0.85 -5.12 -11.91
Morningstar HF Emerging
Markets wMSCI -12.02 -2.65 -0.90 -15.12 -33.41
Morningstar HF Europe
wMSCI -3.20 0.00 -0.02 -3.22 -11.56
Morningstar HF Global
Markets wMSCI -7.09 -0.75 1.36 -6.54 -22.73
Morningstar HF Japan
wMSCI -5.04 1.12 1.61 -2.42 -12.56
Morningstar HF North
America wMSCI -7.05 -3.82 0.63 -10.04 -18.60
Process Groups
Morningstar HF Directional
Trading wMSCI 1.37 1.36 1.41 4.20 3.50
Morningstar HF
MultiProcess Grp wMSCI -5.59 -2.36 -0.58 -8.35 -19.73
Morningstar HF Relative
Value wMSCI -7.06 -1.11 2.06 -6.20 -14.26
Morningstar HF Security
Selection wMSCI -8.49 -3.08 0.47 -10.89 -24.99
Morningstar HF Specialist
Credit wMSCI -8.79 -3.51 -3.06 -14.69 -21.86
Size
Morningstar HF Composite
Core Fds wMSCI -5.21 -1.46 0.80 -5.84 -15.25
Morningstar HF Composite
Small Fds wMSCI -5.96 -2.05 0.74 -7.20 -17.30
Market Indexes
MSCI AC Asia USD -18.73 -3.14 8.69 -14.43 -41.62
MSCI EM USD -27.50 -7.63 7.60 -27.94 -54.48
MSCI Europe USD -21.32 -7.23 5.18 -23.22 -48.20
MSCI World USD -19.05 -6.72 3.06 -22.18 -42.08
S&P 500 TR -16.79 -7.18 1.06 -21.94 -37.00
Russell 2000 TR USD -20.80 -11.83 5.80 -26.12 -33.79
USTREAS T-Bill
Auction Ave 3 Mon 0.07 0.03 0.00 0.10 1.51
BarCap Global
Aggregate TR USD -3.69 2.89 6.21 5.25 4.79
*All assets are in U.S. dollar terms
**For the Morningstar Hedge Fund Indexes, assets are based on hedge funds
that reported performance as of Jan. 19, 2008. For the Morningstar Hedge
Fund Indexes With MSCI, assets are based on hedge funds that reported
performance as of Jan. 15, 2008. Hedge funds flows are based on hedge
funds that reported November net assets and performance as of Jan. 19,
2008.
Morningstar has been advised by legal counsel that the publication of
hedge-fund specific information could violate the United States
Securities and Exchange Commission prohibition on general solicitation
under rules relied upon by hedge funds in general.
Estimated Net Flow by Morningstar
Category Through November 2008 ($mil) 1 Mo QTD YTD
Convertible Arbitrage $(230) $(378) $(1,620)
Corporate Actions $(364) $(1,858) $(3,090)
Debt Arbitrage $(309) $(1,540) $(2,158)
Developed Asia Equity $(1,126) $(1,892) $(3,763)
Distressed Securities $(217) $(841) $3,468
Emerging Market Equity $(947) $(2,186) $(3,139)
Equity Arbitrage $(1,857) $(3,678) $(2,517)
Europe Equity $(2,806) $(5,076) $(16,065)
Global Debt $(565) $(1,809) $(5,588)
Global Equity $(576) $(1,697) $(1,175)
Global Non-Trend $(1,894) $(4,621) $(14)
Global Trend $(4,199) $(6,546) $5,567
Multi-strategy $(1,918) $(4,924) $(1,404)
Short Equity $(21) $27 $78
U.S. Equity $(2,386) $(5,038) $(13,024)
U.S. Small Cap Equity $5 $(184) $27
Estimated Total Net Flow ($mil) $(19,410) $(42,241) $(44,417)
Estimated Net Flow by Rating
Through November 2008 ($mil) 1 Mo QTD YTD
5-Star $(3,546) $(5,106) $6,250
4-Star $(5,205) $(12,230) $(1,145)
3-Star $(6,055) $(13,679) $(31,694)
2-Star $(1,439) $(6,046) $(18,525)
1-Star $(229) $(1,498) $(6,078)
Not Rated $(2,936) $(3,683) $6,775
Estimated Total Net Flow ($mil) $(19,410) $(42,242) $(44,417)
Media Contact:
Alexa Auerbach 312-696-6481, alexa.auerbach@morningstar.com
SOURCE Morningstar, Inc.
