Hedge funds linked to emerging markets recovered some of their previous losses, according to data for December last year, while the overall index of returns showed a rise, along with global equities.

The Morningstar MSCI Composite AW Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds, rose 0.9 per cent in December, along with global stock markets, Morningstar, the fund-tracking firm, said.

Meanwhile, hedge funds concentrated in emerging markets, which Morningstar said “lost more than expected last month,” regained some of their losses in December.

“In December, hedge funds benefited from a continuation of the prior-month’s trends,” said A J D’Asaro, fund analyst at Morningstar.

D’Asaro added: “Funds that were surprised by rising interest rates in the United States and falling emerging market stocks in November were able to reposition themselves and deliver gains in December.”

The MSCI World NR global stock index climbed 2.1 per cent, while the Barclays Global Aggregate TR bond index fell 0.6 per cent. The latter was in part due to rising US and European interest rates in December, Morningstar said.

The Morningstar MSCI Emerging Markets Hedge Fund Index, for example, rose 0.8 per cent in December, as hedge funds pivoted exposures away from the BRICS and into frontier markets such as the Middle East, which “performed much better,” the firm said.

In line with other industry research on the sector (see here), Morningstar said hedge funds “strongly outperformed” the un-hedged MSCI Emerging Markets Index, which declined 1.5 per cent.

The Morningstar MSCI Emerging Markets Hedge Fund Index, by contrast, climbed 3.7 per cent for the year ended December 2013, while the MSCI Emerging Markets Index declined 2.6 per cent.

US equity-based hedge fund strategies profited from a milder Fed tapering than expected and improving economic data in the US, Morningstar noted. The Morningstar MSCI North America Hedge Fund Index increased 1.5 per cent in December as the S&P 500 reached “new all-time highs,” for example.

Meanwhile, the Morningstar MSCI Fixed Income Hedge Fund Index inched up 0.2 per cent in December, “aided in part by investments with higher credit risk,” the firm said. The Morningstar MSCI Fixed Income Hedge Fund and Morningstar MSCI Fixed Income Arbitrage Hedge Fund indexes increased 3.9 per cent and 3.5 per cent respectively in 2013, having benefited from hedged duration risk during the year. On the other hand, the un-hedged Barclays Global Aggregate TR Index decreased 0.6 per cent in December and fell 2.6 per cent for the year.