Morningstar Reports Hedge Fund Performance for the Second Quarter of 2010, Asset Flows Through May

CHICAGO, July 27 /PRNewswire-FirstCall/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today reported preliminary hedge fund performance for June 2010 and asset flows through May. In June, the Morningstar 1000 Hedge Fund Index fell 0.3%, ending the quarter with a 3.6% loss, and down 2.2% for the year to date. The currency-hedged Morningstar MSCI Composite Index also dipped slightly in June, 0.2%, finishing the quarter down 1.5%.  

Losses in May dragged quarterly results down for almost every hedge fund strategy, particularly the equity strategies. Global equities tanked in the wake of Europe's debt crisis, uncertainty regarding financial regulation, and disappointing economic indicators in the United States. Hedge funds held up better than the unhedged markets, but nonetheless suffered losses. The Morningstar Europe Equity Hedge Fund Index lost 8.3% against the MSCI Europe NR stock index's 15.2% quarterly plunge, while the Morningstar US Equity Hedge Fund Index fell only 4.7% over the quarter against the S&P 500's 11.4% decline.

"The markets took hedge funds downhill in the second quarter, but in the end, many arrived with their hats still on," said Nadia Papagiannis, alternative investments strategist for Morningstar. "Whereas absolute returns are not always possible for hedge funds, hedged strategies do tend to protect investors' wealth during selloffs."  

The credit markets also experienced major turbulence. Besides sovereign debt problems in European countries such as Greece and Spain, the U.S. municipal market deteriorated, as states such as Illinois and California face large deficits and financing difficulties. Debt-oriented hedge funds found safety in U.S. Treasuries and sovereign credit default swaps. The Morningstar MSCI Specialist Credit and the Morningstar Debt Arbitrage Hedge Fund indexes concluded the quarter with minor losses of 0.3% and 0.1%, respectively.

Volatility and quick reversals in trading patterns in May and June did not bode well for funds in the Morningstar Global Trend Hedge Fund Index that aim to profit from longer-term price trends in derivatives. The index fell 4.0% in May and recovered 0.4% in June. Sustained upward price trends in U.S. and Japanese government bonds contributed to profits in June.  

Merger arbitrage also experienced some modest gains in June, although overall U.S. merger and acquisition deal volume for the year to date fell to its lowest point since 2003, according to Mergermarket. Tightening spreads contributed to profits in June, though, and pockets of optimism were seen in smaller-capitalization deals and in countries such as India. The Morningstar MSCI Merger Arbitrage Hedge Fund index gained 0.5% in June and 0.1% for the quarter.

Corporate event-driven strategies such as merger arbitrage saw inflows in May. Overall, funds in Morningstar's database pulled in $1.2 billion for the month, although these funds have experienced net outflows of $2.1 billion in the first five months of the year. Multi-strategy funds in the database suffered significant withdrawals year to date of $2.7 billion.

June returns for the Morningstar Hedge Fund Indexes and the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of July 26, 2010. May asset flows are based on funds that reported as of July 19, 2010. 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 8,000 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 360,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 21 countries.

Media Contact:

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SOURCE Morningstar, Inc.