The Morningstar MSCI Composite Hedge Fund Index inched up 0.5 per cent in August, with event-driven strategies posting their largest monthly rise in almost six months, following growing investor risk tolerance and lower equity volatility levels.

"Despite light trading volume throughout August, developed markets equities notably benefited from improving US economic data and the European Central Bank's bond-buying proposal Morningstar said. However, depsite the 0.5 per cent gain, the MSCI Composite Hedge Fund Index fell short of the MSCI World Stock Index, which climbed 2.5 per cent.

Event-driven firms typically seek to exploit mis-pricings of debt, equities and other securities that are caused by occurrences such as mergers, acquisitions, legal rulings or other developments. 

"Speculation of further central bank easing in the US and Europe drove most global equity markets higher in August," said Mallory Horejs, an alternative investments analyst at Morningstar. "Managers across most hedge fund strategies found opportunities to profit."

Whilst hedge funds investing in North America and Europe rose, they failed to keep pace with the unhedged stock markets. For example, the Morningstar MSCI North America Hedge Fund Index climbed 1.5 per cent, but fell short of the SandP 500 Index's 2.3 per cent increase. Meanwhile, the Europe index trailed the MSCI Europe stock market index by a wider margin, with the indexes rising 0.5 per cent and 4.4 per cent respectively.

"Overall, investor sentiment continued to improve throughout the month, and the Chicago Board of Options Exchange Volatility Index fell to levels not seen since 2007," the firm said.

Strategies

Morningstar's MSCI Event-Driven and MSCI Merger Arbitrage Hedge Fund indexes jumped 1.1 per cent and 0.4 per cent respectively. High-yield securities also rallied sharply in August, with the MSCI Distressed Securities Hedge Fund Index rising 1.4 per cent against the Barclays Global High Yield Index's 2.1 per cent gain. The MSCI Specialist Credit Hedge Fund Index climbed 0.9 per cent.

For Asia-Pacific and emerging markets equities, August was less bright. Japan's second quarter GDP was revised downward and growth prospects in China continued to decline, the firm said. Specifically, the MSCI Asia-Pacific and MSCI Emerging Market stock market indexes dipped 0.6 per cent and 0.3 per cent respectively.

Nonetheless, hedge funds investing in these regions "managed to provide investors some downside protection," with the Morningstar MSCI Asia-Pacific and MSCI Emerging Markets Hedge Fund indexes posting "modest increases" of 0.4 per cent and 0.9 per cent respectively.

Meanwhile, price trend strategies also posted losses last month, as currency trading proved "especially challenging," the firm noted.  

"After leaking more than $2.5 billion in June, hedge funds in Morningstar's database experienced yet another month of sizable outflows, bleeding $4.2 billion in July," the firm said.

For the year-to-date (July,) single-manager hedge funds within the database lost over $5.1 billion. Systematic futures funds experienced the greatest outflows by far, losing $3.8 billion in July alone. "Investors timed these withdrawals well, though, given the category's overall poor performance in August." Funds in the event-driven and distressed-securities categories also suffered, losing $415 million and $346 million respectively.

In total, Morningstar has about 11,000 hedge funds and funds of hedge funds in its database.