Economic uncertainty and acute liquidity problems battered most hedge fund strategies in the first quarter of 2008, with the average return for all funds sinking to -2.99% from 1.64% in the fourth quarter.
Performance numbers for hedge funds managing at least $100 million for the three months ended March 31 were almost uniformly negative across all strategies, according to data from Morningstar Inc.s hedge fund database, run especially for Pensions & Investments.
Only four of 17 Morningstar hedge fund categories produced positive average returns in the first quarter, led by two bright spots. Hedge funds in the short equity fund category averaged 13.02% followed by global trend funds, which produced an average return of 11.33%. Global non-trend funds averaged a 1.69% return while equity arbitrage funds remained barely positive at 0.33% for the quarter.
Data from Chicago-based Morningstar charted the continued downward spiral of hedge funds that invest in emerging markets equity, which came in at rock bottom with an average return of -8.76% in the first quarter, down from -4.3% in the fourth quarter. Funds in Morningstars developed Asia equity strategy also continued to plummet, with an average return in the first quarter of -5.28%, compared with -1.28% in the three months ended Dec. 31.
Hedge funds of funds were not immune to the performance problems of the underlying funds in their portfolios, but the average return of -3.01% placed them roughly in the middle of the ranks of Morningstars strategy categories.
Although most hedge fund strategies landed in negative territory in the first quarter, the category averages all beat the -9.9% return of the Standard & Poors 500 index and the -9.5% return of the Morgan Stanley Capital International Europe Australasia Far East index. The 2.2% return of the Lehman Brothers Aggregate Bond index beat the average returns of 15 of Morningstars 17 hedge fund categories.