CHICAGO, Jan. 22 /PRNewswire-FirstCall/ -- Morningstar, Inc.
(NASDAQ: MORN), a leading provider of independent investment
research, today reported preliminary hedge fund performance for the
fourth quarter and year-end 2009 and asset flows through November.
Although December proved relatively uneventful for hedge funds,
2009 turned out to be the best year since 2003. The Morningstar
1000 Hedge Fund Index gained only 0.1% in December, but ended the
year up 19.5%, missing 2003's 20.3% rise by a small margin.
Similarly, the currency-hedged Morningstar MSCI Hedge Fund Index
rose just 0.2% in December, but finished the year up 14.1%. The
second and third quarters of 2009 generated the most profit for
hedge funds, as the global recovery in stocks and bonds waned
toward year end. The Morningstar 1000 Hedge Fund Index and the
Morningstar MSCI Hedge Fund Index rose 2.1% and 1.9%, respectively,
in the fourth quarter, while the MSCI World Stock Index gained 4.1%
and the BarCap Global Aggregate Bond Index declined 0.9% over the
same period. "2009 was a windfall year for hedge funds," said Nadia
Papagiannis, alternative investment strategist at Morningstar. "The
hedge funds that survived 2008's industry purge, or those that
launched in the aftermath, picked up assets at rock-bottom prices
and rode the recovery to near record profits, particularly in U.S.
equity and debt markets." The least successful strategies of 2008
became the most profitable in 2009. The Morningstar Emerging Market
Equity Hedge Fund Index took the largest hit in 2008, declining
45.7%, but rose 50.4% in 2009. The currency-hedged Morningstar MSCI
Emerging Markets Hedge Fund Index increased 1.7% in December, and
37.1% for the year. The Morningstar U.S. Small Cap Equity Hedge
Fund Index finished as the second-worse performing strategy in
2008, dropping 32.8%, but the third best in 2009, rising 36.4%.
These hedged-equity strategies suffered from poor liquidity in
2008, but regained strength as liquidity returned to the markets in
2009. However, it's notable that the average emerging market or
small-cap equity hedge fund has not yet recovered from 2008's
losses. Convertible arbitrage was among 2008's worst-performing
strategies, but it was 2009's second-best strategy. The Morningstar
Convertible Arbitrage Hedge Fund Index rose 2.1% in December, and
more than 37% in 2009, as many convertible-arbitrage hedge funds
were wiped out in 2008, leaving opportunity for those that remained
in the market. Merger-arbitrage strategies saw a similar fallout in
2008, as broken merger deals and investor redemptions caused the
liquidation of many of these hedge funds. In 2009, however, merger
activity picked up slowly, and reduced competition in
merger-arbitrage trades allowed for outsized profits. The
Morningstar Corporate Actions Hedge Fund Index, which includes
merger arbitrage hedge funds, rose 0.3% in December and 30.0% for
the year. Some hedge fund strategies, though, experienced
unimpressive returns in 2009. The Morningstar Short Equity Hedge
Fund Index and the Morningstar Global Trend Hedge Fund Index each
fell 3.1% in December, ending the year down 1.4% and 1.5%,
respectively. Substantial rebounds in the global equity markets
hurt those hedge funds that take bets on declining stocks. Global
Trend hedge funds, which profit from momentum or price trends in
currencies, interest rates, stocks, and commodities, were
challenged when price trends reversed in many of these markets
throughout the year. Ironically, these same strategies were the
only two that protected wealth in 2008. Although outflows from
hedge funds in Morningstar's database netted $53.4 billion for the
year through November, positive inflows started in June as
redemption gates lifted and market conditions improved. Most
recently, hedge funds enjoyed $4.7 billion of inflows in November
2009, led by Europe Equity, U.S. Equity, Multi-Strategy, and Global
Non-Trend hedge funds, which bet on macro-economic themes. Other
notable trends for the year include the outperformance of small
hedge funds over large and single-manager hedge funds over funds of
hedge funds. The Morningstar MSCI Composite Small Fund Hedge Fund
Index jumped 21.5% in 2009, while the Morningstar MSCI Composite
Core Fund Hedge Fund Index increased only 16.5%. Funds with smaller
assets under management can more easily take advantage of riskier,
smaller, and less-liquid investment opportunities. The Morningstar
Hedge Fund of Fund Index underperformed single-manager
multi-strategy hedge funds (as measured by the Morningstar
Multi-Strategy Hedge Fund Index) in 2009 by a wide margin of more
than nine percentage points. Hedge funds of funds came under fierce
criticism after poor performance and scandal in 2008, and 2009's
results didn't help to bolster their market share. December returns
and November asset flows for the Morningstar Hedge Fund Indexes are
based on funds that reported as of Jan. 20, 2010. Returns for the
Morningstar MSCI Hedge Fund Indexes are based on funds that
reported December performance as of Jan. 15, 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.
Visit http://alternativeinvestments.morningstar.com/ for more
information. 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 more than 325,000 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 20 countries and minority ownership
positions in companies based in two other countries. MORN-R 2
Morningstar Hedge Fund Index Dec. Full Year Performance 2009 Q4
2009 2009 ---------------------------- ----- ------- ----------
Morningstar 1000 HF USD 0.09 2.09 19.47 Morningstar Hedge Fund of
Funds -0.65 1.29 13.06 Morningstar Hedge Fund Category Indexes
------------------------------- Morningstar Convtbl Arbitrage HF
USD 2.11 3.89 37.26 Morningstar Corporate Actions HF USD 0.29 2.80
29.97 Morningstar Debt Arbitrage HF USD 1.75 5.39 26.73 Morningstar
Distressed Sec HF USD 4.57 7.64 23.99 Morningstar Dvlp Asia Equity
HF USD 1.40 0.34 18.40 Morningstar EM Equity HF USD 1.91 6.55 50.44
Morningstar Equity Arbitrage HF USD -0.16 0.88 6.93 Morningstar
Europe Equity HF USD -0.49 -0.31 16.97 Morningstar Global Debt HF
USD 0.73 3.29 21.96 Morningstar Global Equity HF USD 1.18 2.55
21.67 Morningstar Global Non Trend HF PUSD -1.45 1.30 7.49
Morningstar Global Trend HF USD -3.12 -0.85 -1.48 Morningstar
Multi-Strategy HF USD 0.66 2.60 22.50 Morningstar Short Equity HF
PUSD -3.11 -3.36 -1.41 Morningstar US Equity HF USD 2.28 3.71 28.17
Morningstar US Small Cap Eqty HF USD 3.80 4.25 36.36 Morningstar
Hedge Fund Indexes with MSCI ------------------------------
Morningstar MSCI Composite AW 0.23 1.89 14.10 Morningstar MSCI
Composite EW 1.10 2.66 19.69 Morningstar MSCI Composite Core Funds
0.89 2.29 16.49 Morningstar MSCI Composite Small Fund 1.21 2.81
21.52 Morningstar MSCI Developed Markets 1.51 2.72 18.86
Morningstar MSCI Directional Trading -1.07 1.18 8.00 Morningstar
MSCI Emerging Markets 1.68 4.24 37.13 Morningstar MSCI Europe 1.59
0.80 13.98 Morningstar MSCI Global Markets -0.04 2.07 14.22
Morningstar MSCI Japan 1.24 -2.66 7.36 Morningstar MSCI
Multi-Process Group 1.08 3.29 26.74 Morningstar MSCI North America
2.41 3.89 25.72 Morningstar MSCI Relative Value 1.83 2.84 18.28
Morningstar MSCI Security Selection 2.36 3.37 26.67 Morningstar
MSCI Specialist Credit 3.12 5.08 21.78 Market Indexes
-------------- S&P 500 TR 1.93 6.04 26.46 Russell 2000 TR USD
8.05 3.87 27.17 MSCI Europe NR USD 1.51 3.24 35.83 MSCI AC Asia NR
USD 2.57 1.80 31.73 MSCI World NR USD 1.80 4.07 29.99 MSCI Emerging
Markets NR USD 3.95 8.55 78.51 BarCap US Agg Bond TR USD -1.56 0.20
5.93 BarCap Global Aggregate TR USD -3.76 -0.85 6.93 Est. Hedge
Fund Flows By Morningstar Category Nov. 2009 Flows YTD Thru Nov.
------------------------ --------------- ------------- Convertible
Arbitrage $(80,937,788) $168,113,033 Corporate Actions $263,074,035
$(3,474,105,660) Debt Arbitrage $(1,176,975) $(2,899,427,839)
Developed Asia Equity $240,441,385 $(5,354,438,577) Distressed
Securities $274,532,013 $(3,891,441,312) Emerging Market Equity
$335,680,176 $(1,791,606,808) Equity Arbitrage $(22,674,410)
$(1,745,299,600) Europe Equity $1,273,266,173 $4,214,742,950 Global
Debt $(178,326,278) $(4,506,349,748) Global Equity $348,466,228
$(6,671,425,720) Global Non-Trend $743,171,289 $(2,126,195,137)
Global Trend $(102,240,277) $(1,818,784,374) Multi-strategy
$929,320,577 $(16,489,087,943) Short Equity $(24,162,544)
$(88,022,017) U.S. Equity $676,088,210 $(6,324,221,518) U.S. Small
Cap Equity $(23,364,532) $(613,392,370) ---------------------
------------ ------------- Total $4,651,157,282 $(53,410,942,640)
Hedge Fund of Fund Flows ------------------------ Fund of Funds -
Debt $24,492,539 $(69,557,565) Fund of Funds - Derivatives
$(107,447) $(130,123,018) Fund of Funds - Equity $65,602,466
$(2,843,106,074) Fund of Funds - Event $596,110 $(241,011,179) Fund
of Funds - Multistrategy $26,593,477 $(4,065,619,082) Fund of Funds
- Nondirectional $(165,337) $3,511,354 --------------- ---------
---------- Total $117,011,808 $(7,345,905,564) Hedge Fund Flows By
Morningstar Rating -------------------------------------- 5-star
$1,652,970,479 $(4,575,281,975) 4-star $1,946,296,742
$(4,923,049,122) 3-star $217,966,397 $(16,476,228,651) 2-star
$9,720,936 $(13,307,214,141) 1-star $(319,817,037) $(4,918,110,542)
Not-Rated $1,261,031,573 $(16,556,963,773) --------- --------------
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Contact: Alexa Auerbach, 312-696-6481 or DATASOURCE: Morningstar,
Inc. CONTACT: Alexa Auerbach of Morningstar, Inc., +1-312-696-6481,
Web Site: http://www.morningstar.com/
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