Morningstar, a provider of independent investment research, has reported preliminary hedge fund performance for April 2014 as well as estimated asset flows for March 2014.

The Morningstar MSCI Composite AW Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds in the Morningstar Hedge Fund database, increased 0.1% in April, in yet another month of divergent performance between large- and small-cap stock indexes.

The SandP 500 rose 0.7% while the small-cap Russell 2000 declined 3.9%. The Morningstar MSCI Composite AW Hedge Fund Index has increased 1.2% for the year through April.

"Markets continued divergent performance in April," A.J. D’Asaro, fund analyst at Morningstar, said. "U.S. small-cap companies, traditionally a bulwark for hedge funds, declined further as investor sentiment reversed in small-cap growth stocks. European stocks, however, rebounded slightly on the Geneva agreement between Russia and the EU concerning Ukraine."

Short-bias hedge funds benefited for the third straight month as overvalued stocks plummeted, especially in the technology sector. The Morningstar MSCI Short Bias All Size Hedge Fund Index increased 1.2% in April, the largest increase of any Morningstar MSCI hedge fund index.

This showing comes on the heels of a 4.4% gain in February and 0.8% gain in March. The Morningstar MSCI Short Bias All Size Hedge Fund Index has increased 5.5% year to date.

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Large differences between the performance of large-cap and small-cap stocks weighed on many hedge funds. The Morningstar MSCI North America Hedge Fund Index declined 0.2% in April, while the SandP 500 Index rose 0.7%.

The Morningstar MSCI Small Cap Hedge Fund Index, which represents primarily small-cap long-short equity strategies, fell 1.0% in April, while the Russell 2000 Index sank 3.9%.

The Morningstar MSCI North America Hedge Fund Index and the Morningstar MSCI Small Cap Hedge Fund Index rose 11.5% and 16.1%, respectively, for the 12 months ended April 2014, while the SandP 500 and Russell 2000 Indexes increased 20.4% and 20.5%, respectively, over the same period.

European stocks rallied with the Geneva accord on Ukraine signed April 17, but hedge funds largely missed the rally. The Morningstar MSCI Europe Hedge Fund Index was flat in April, as many funds were short or had significantly hedged exposures.

Emerging markets hedge funds rebounded further in April after struggling in the first quarter with a strengthening U.S. dollar and increased perception of political risk. The Morningstar MSCI Emerging Markets Hedge Fund Index rose 0.6%, which brought its year-to-date increase to 0.7%.

In contrast, the unhedged MSCI Emerging Markets Index advanced 0.3% in April, still failing to retrench its staggering loss of 6.5% in January. The Morningstar MSCI Emerging Markets Hedge Fund Index and the MSCI Emerging Markets Index have fallen 1.2% and 1.8%, respectively, for the 12 months ended April 2014.

Managed futures hedge fund strategies faced headwinds in April, but were slightly positive as trends continued from the prior month. The Morningstar MSCI Directional Trading Hedge Fund Index, which includes both discretionary and systematic futures-based strategies, increased 0.1%, and the Morningstar MSCI Systematic Trading Hedge Fund Index rose 0.2% in April.

For the 12 months ended April 2014, the Morningstar MSCI Directional Trading Hedge Fund Index decreased 1.3%, and the Morningstar MSCI Systematic Trading Hedge Fund Index declined 5.4% as hedge funds struggled with frequent reversals of investor sentiment in 2013.

Arbitrage strategies performed well in April. In the merger arbitrage and corporate activity space, deal flow was robust and many companies moved to spin off portions of their business to unlock value.

The Morningstar MSCI Arbitrage Hedge Fund Index increased 0.5% in April, and is up 4.9% for the 12 months ended April 2014. The Morningstar MSCI Fixed Income Arbitrage Index also rose 0.6% in April, and is up 3.1% for the 12 months ended April 2014.

In aggregate, single-strategy hedge fund assets in Morningstar’s database grew by an estimated $661 million in March. Four- and five-star Morningstar rated funds gained a collective $612 million, while funds with average, below average, or very short track records gained a small amount. Systematic futures hedge fund assets continued their long decline in April, with $447 million in outflows. Systematic futures were the hedge fund industry’s biggest loser over in 2013, with a staggering $10.7 billion in outflows.

Event-driven and long/short debt hedge funds experienced the greatest inflows in March, of $264 million and $321 million, respectively, as investors sought alternatives to the interest rate risk of high duration bonds. Global long/short equity also received inflows, of $200 million, possibly reflecting investors’ more moderately bullish sentiment on equities in 2014.

For the trailing 12 months, single-strategy hedge funds in Morningstar’s database have lost $5.1 billion, with the majority of outflows coming from systematic futures hedge funds.

April returns for the Morningstar MSCI Hedge Fund Indexes are based on funds that reported as of May 28, 2014. March asset flows are based on funds that reported as of May 14, 2014. Hedge fund investors, managers, consultants, and advisors can access additional information through Morningstar DirectSM, the company’s global research platform for institutions.

Morningstar has approximately 20,000 hedge funds and funds of hedge funds in its database. Morningstar calculates hedge fund indexes by applying the MSCI Hedge Fund Index Methodology and Hedge Fund Classification Standard to Morningstar’s hedge fund database. These indexes demonstrate the performance of hedge funds to investors who have hedged their currency exposure back into U.S. dollars.

The MSCI Hedge Fund Index Methodology classifies hedge funds by investment process, geography, and asset class. These indexes are not investible.

This release is not intended to be an offer or solicitation for the sale of hedge funds. The information is not warranted to be accurate, complete, or timely. When considering hedge funds, investors should consider various risks, including the fact that some products engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager.

The high degree of leverage that is often obtainable in trading can lead to large losses as well as gains. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.