Hedge funds were down 1.27% in June, ending the second quarter with negative returns of 1.06%. The month was marked by trend reversals in the markets and changes in investor risk appetite, which was the prevalent theme throughout the second quarter. However hedge funds outperformed the underlying markets, as the MSCI World Index declined by 1.88%2 during the month and was down 1.77% for 2Q 2011.

Key highlights for June:

• Hedge funds outperform underlying markets in 2nd quarter by 0.71% but remain flat YTD (+0.24%)
  
• All strategies delivered negative returns for only the fourth time in the last ten years
  
• Net asset flows remained positive for the seventh consecutive month – US$1.5 billion
  
• Net asset flows for 1H 2011 stand at US$113.8 billion, the strongest first 6 months since 2006
  
• Launch activity remains strong in 2011 with more than 400 funds launched in the first half of the year
  

Market sentiment was initially bearish in the month, amid concerns of a slowdown in the US economy as well as the European sovereign debt crisis. This trend reversed in the latter half of the month as concerns faded, due to developments in the Euro-zone and positive economic data from China. Most regions finished June in negative territory, with the exception of Japanese hedge funds which witnessed positive returns of 0.27% - the Nikkei 225 was up 1.26% in June, as the month-end rally made up for losses in the previous weeks. June YTD, Japanese hedge funds were up 0.98%, outperforming the underlying markets by more than 5% - the Nikkei saw losses of 4.04% over the same period.

Amongst the other regions, Latin American hedge funds were the best performers- with flat to slightly negative returns of -0.06%. Regional managers have provided significant downturn protection this year with June YTD returns of 2.98% - the highest amongst all hedge fund regions, while the MSCI EM Latin American Index is down 8.51%.

Amongst strategic mandates, trend followers struggled through another month of trend reversals and market unpredictability leading to losses. All strategies delivered negative returns for only the fourth time in the last ten years. The Eurekahedge CTA/Managed Futures Hedge Fund Index was down 2.48% in June, the second month that the strategy has delivered the lowest returns. Prominent themes that led to the losses were the sudden change in market direction towards the end of the month and the price shocks from the commodity and energy sectors – the S&P Goldman Sachs Commodity Index was down 5.31%. Managers with exposure to equities witnessed negative returns as most market indices ended the month in negative territory while the month-end trend reversal also effected hedge funds trading in the bonds sector. Fixed income assets rallied early on in the month, however the month end developments in Europe led to a sharp sell-off in the safe haven assets.