The Morningstar 1000 Hedge Fund Index rose 2.8 per cent in March, while the currency-hedged Morningstar MSCI Composite Index increased 2.3 per cent.
For the quarter, these indexes ended up 1.6 per cent and 2.5 per cent respectively.
Hedge fund returns were bolstered by a global equity market rally in March. The MSCI World Stock Index climbed 6.0 per cent, as stock markets in Europe, Asia, the US and emerging countries all showed substantial gains.
Hedge funds in Morningstar’s database appeared to be hedged similarly in March as they were in November 2009, when hedge funds captured only a small fraction of that month’s equity market profits. Contributors to gains for stocks in March included the US Federal Reserve’s announcement reiterating a low interest rate policy, the European Union’s move toward a bailout of Greece, and positive manufacturing indicators in the US, EU, and Japan.
"Hedge funds remain cautious, but they are peeking their heads out at the stock market rally," says John Rekenthaler, Morningstar’s vice president of research. "They are assuming greater market risk while equity markets rebound."
As is typical during market recoveries, the riskiest asset classes tended to show the largest gains. The Morningstar Emerging Market Equity Hedge Fund Index and the currency-hedged Morningstar MSCI Emerging Markets Hedge Fund Index rose 4.3 per cent and 4.8 per cent, respectively, in March. Eastern European stocks moved the most, benefiting from the EU’s support of Greece.
Another risky asset class, distressed securities, also saw outsized returns in March—the Morningstar Distressed Securities Hedge Fund Index rose 5.8 per cent. Global issuance of junk bonds reached a record high for the first quarter of the year, according to Thompson Reuters, and investors seeking yield soaked up the supply. As equities and risk debt surged in March, investment grade and government issues lagged. The Morningstar Global Debt Index gained a modest 1.4 per cent.
The Morningstar Corporate Actions Hedge Fund Index rose 3.5 per cent in March, even though overall global deal volume continues to disappoint. Deals surged in Asia in the first quarter, however, providing some investment opportunities.
Morningstar’s Global Trend Hedge Fund Index, which tracks funds that profit from upward and downward price trends in global stocks, bonds, commodities, and currencies, enjoyed a 4.1 per cent increase in March. Momentum in oil prices, which hit 17-month highs due to positive global economic data and President Obama’s new offshore drilling policy, as well as a rising US dollar and falling gold prices, contributed to gains in trend-following funds.
Hedge funds in the Morningstar database saw overall inflows of USD2.6bn in February, bringing net outflows down to approximately USD1.0bn for the first two months of the year.