Morningstar Reports Hedge Fund Performance for March, Asset Flows Through February

CHICAGO, April 25, 2011 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today reported preliminary hedge fund performance for March 2011 as well as asset flows through February. The Morningstar 1000 Hedge Fund Index, a composite of the largest hedge funds in Morningstar's database, rose 0.1% for the month, while the currency-hedged Morningstar MSCI Hedge Fund Index declined 0.4%. Overall, most hedge fund strategies slightly outperformed the S&P 500 Index in March, which was virtually flat at 0.04%.

The economic shock to Japan following the country's earthquake, tsunami, and ensuing nuclear crisis affected many hedge funds in March, particularly those in the Morningstar Developed Asia Equity and the Morningstar MSCI Japan Hedge Fund Indexes, which fell 0.3% and 2.3%, respectively. Although the events in Japan reverberated across the globe and caused stock market volatility to spike to its highest level in nine months, recovery came quickly, and the Morningstar Global Equity Hedge Fund Index ended the month up 1.2%.

"A sharp increase in volatility and continued geopolitical unrest threatened to stunt hedge fund performance in March, but most strategies finished the month positive with strong overall first-quarter gains," said Mallory Horejs, alternative investment analyst for Morningstar.  

All other equity strategies continued to climb higher in March. The Morningstar Emerging Markets Equity and the currency-hedged Morningstar MSCI Emerging Markets Hedge Fund Indexes, which rose 1.4% and 2.4%, respectively, saw the strongest growth. March performance for these hedge fund indexes trailed that of the MSCI Emerging Market Equity Index, but it pulled both indexes into positive territory for the quarter. The two emerging market hedge fund indexes finished the quarter up 1.2% and 0.7%, respectively.

European stock markets stayed strong throughout the quarter, despite the ongoing sovereign debt crisis in Ireland, Portugal, and Greece. Accordingly, the Morningstar Europe Equity Hedge Fund Index increased 1.3% in March and 4.4% for the quarter. U.S. stocks, however, lost momentum in March in light of rising uncertainty regarding monetary policy, a discouraging slump in housing starts, and a peak in oil prices. Nonetheless, the Morningstar U.S. Equity and Morningstar U.S. Small Cap Equity Hedge Fund Indexes still enjoyed modest monthly increases of 0.2% and 0.5%, respectively. The Morningstar U.S. Small Cap Equity Hedge Fund Index outpaced all other hedge fund indexes in the first quarter, rising 4.8%.

Despite resilience across equity markets, macro-economic hedge fund strategies failed to deliver in March. The Morningstar Global Non-Trend Hedge Fund Index decreased 1.7% this month, erasing February's jump, and placing the index last with a 1.9% quarterly decline. Morningstar's Global Trend Hedge Fund Index, which includes funds that trade futures primarily according to momentum strategies, did not fare much better. It declined 1.3% in March but managed to end the quarter in the black, at 0.4%.

Relative-value strategies delivered their fourth consecutive month of positive returns in March, as the Morningstar Convertible Arbitrage, Morningstar Debt Arbitrage, and Morningstar Equity Arbitrage Hedge Fund Indexes advanced 0.9%, 0.6%, and 0.8%, respectively. The Morningstar MSCI Merger Arbitrage and the Morningstar Corporate Actions Hedge Fund Indexes, which increased 1.9% and 3.4% during the first quarter, respectively, benefited from a surge in worldwide M&A activity, which reached its highest levels since 2008.

Flows into hedge funds also reached recent highs. Hedge funds in Morningstar's database netted $5.2 billion of inflows in February, the largest monthly inflow figure since August 2009. Almost all categories gained assets, although the bulk went to funds in Morningstar's European equity ($872 million), U.S. equity ($1.1 billion), and global trend ($1.6 billion) hedge fund categories. Emerging market equity and global non-trend were the only hedge fund categories to leak assets in February, as investors reacted to increased geopolitical unrest, particularly across North Africa and the Middle East.

Funds of hedge funds in Morningstar's database also saw inflows in February of $669 million, following five consecutive months of sizeable outflows. The Morningstar Hedge Fund of Funds Index slightly outperformed the overall hedge fund index in the month of March, with a 0.3% rise, but the average hedge fund of funds underperformed both the overall hedge fund index as well as the average multi-strategy hedge fund during the first quarter of 2011.  

March returns for the Morningstar Hedge Fund Indexes and the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of April 18, 2011. February asset flows are based on funds that reported as of April 14, 2011. Hedge fund investors, managers, consultants, and advisors can access additional information through the Morningstar® Alternative Investment Center(SM), formerly Morningstar® Altvest(SM), the company's research platform designed specifically for hedge funds, or Morningstar Direct(SM), the company's global research platform for institutions.

Morningstar has approximately 11,000 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 January 2003. The index comprises the top 90% of eligible assets in Morningstar's hedge fund database. For the purposes of the index, Morningstar counts funds with shared portfolios as a single hedge fund; funds of hedge funds are excluded from consideration. The index is updated daily for the previous month-end, rebalanced monthly, and reconstituted semi-annually. In addition, Morningstar has 17 category indexes and four broad category indexes based on Morningstar's strategy-specific classification system for hedge funds. Morningstar's hedge fund indexes are not investable.

In addition to calculating the Morningstar Hedge Fund Indexes, Morningstar also calculates hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstar's hedge fund database. These indexes demonstrate the performance of hedge funds to investors who have hedged their currency exposure back into U.S. dollars. The MSCI Hedge Fund Index Methodology classifies hedge funds by investment process, geography, and asset class.

This 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 North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 380,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services and has approximately $130 billion in assets under advisement and management as of December 31, 2010. The company has operations in 26 countries.

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SOURCE Morningstar, Inc.