The Morningstar MSCI Composite Hedge Fund Index rose 0.7 per cent last month and finished the quarter up 3 per cent, with equity-focused hedge funds delivering some of the strongest returns among all strategies, despite lagging the broader market.

“Global equity markets rallied on the back of monetary easing steps taken by central banks," said Terry Tian, alternative investments analyst with Morningstar. "Equity-focused hedge funds were the biggest winners in September.”

The US stock market "continued to climb" as the Federal Reserve rolled out the third round of quantitative easing. The S&P 500 and Russell 2000 rose 2.6 per cent and 3.3 per cent respectively last month, and 6.2 per cent and 5.2 per cent over the quarter. The MSCI Equity Hedge Fund Index rose 1.9 per cent, while the MSCI Small Cap Hedge Fund Index rose 2.9 per cent, ending the third quarter up 3.6 per cent and 4.6 per cent respectively.

"The supportive policies of the US Federal Reserve and the European Central Bank helped drive emerging markets stock prices higher as well," Morningstar said. The MSCI EM NR Index jumped 6 per cent in September and 7.7 per cent for the third quarter, while the MSCI Emerging Market Hedge Fund Index rose 1.7 per cent in September and 3.3 per cent for Q3.

Event-driven strategies - which last month were at a six-month high - delivered the third consecutive month of positive returns, as merger deal flow and risk appetite remained strong. The MSCI Event-Driven Hedge Fund Index "turned out to be one of the best-performing hedge fund indexes," the firm said, rising 3 per cent in September and finishing the third quarter up 5.1 per cent.

However, for managed futures strategies September "proved to be a difficult month" due to reversals in commodity markets. "Crude oil prices, for example, rose in early September, but reversed later in the month as Saudi Arabia increased production and investors feared a slowdown in China," the firm said. "Major agricultural commodities, such as corn and soybeans, fell in September after an extended summer rally." While the MSCI Systematic Trading Hedge Fund Index fell 0.7 per cent for the month, it remained up 2.2 per cent for the quarter.

Meanwhile, in August single-manager hedge funds in Morningstar's hedge fund database leaked $1.8 billion, with the systematic futures category experiencing the heaviest redemptions among all single-manager categories, losing $3.4 billion. On the other hand, debt arbitrage and global macro categories saw $784 million and $438 million of inflows respectively.