Hedge funds have outperformed bonds, but have slightly underperformed equities, according to MSCI Barra. T he MSCI Hedge Fund Composite I...

Hedge funds have outperformed bonds, but have slightly underperformed equities, according to MSCI Barra. T he MSCI Hedge Fund Composite Index returned 4.3 per cent in the third quarter of 2005, while the MSCI World Equity Index rose 7.0 per cent and the MSCI World Sovereign Debt Index fell by 1.1 per cent. This compares to the second quarter of 2005 when the Hedge Fund Composite Index was up 0.9 per cent. Asset flows into hedge funds remain positive with the exception of relative value funds which were the sole process group with overall asset outflows. The greatest inflows were experienced by long bias funds. Overall, though, positive asset flows into hedge funds in the MSCI Hedge Fund Composite Index have slowed substantially in 2005 ($13,913 million) relative to the previous 2 years ($49,699 million in 2003, and $50,343 million in 2004). Down 3 per cent convertible arbitrage funds turned in the worst performance over the past 12 months and have also had the largest capital withdrawals for funds in the MSCI Hedge Fund Composite Index. The Distressed Securities Index was the best performing strategy in each of the 1 year, 3 year and 5 year periods ending September 30 2005. EMEA funds produced the highest returns over both the last three and twelve months, with returns of 14.8 per cent and 27.7 per cent respectively. Continuing the trend from 2004, funds focusing on emerging markets outperformed funds focusing on developed markets and global markets. In the third quarter of 2005, funds investing in developed markets, primarily North America, showed the largest inflows ($4,651 million), while those investing in Global Markets displayed the only overall outflow ($98 million) of the three geographical regions. Funds in the MSCI Hedge Fund Composite Index focusing on Japan outperformed all other categories in the third quarter, gaining 10.3 per cent. But over the past year, funds focused on Japan gained 13.9 per cent, while funds focused on emerging markets returned 17.6 per cent. Funds focused on developed markets turned in the lowest performance, up 4 per cent for the quarter.