Hedge funds started making money again in July, with the Morningstar 1000 Hedge Fund Index up 2.7% over the previous month. The index was up 0.35% year to date, Morningstar said.

Signs of a global recovery helped boost hedge fund performance, but many hedge fund managers missed the boat. A market rally took the MSCI Europe NR Stock Index up 11.6% in July, while Morningstar's Europe Hedge Fund Index rose only 5.6%.

According to Nadia Papagiannis, alternative investments strategist at Morningstar, this was more a case of hedge fund managers not trusting the rally and shoring up against a dip that didn't happen, in July at least.

The rebound in the equity markets, especially in Europe, and a bump in investor sentiment, had a positive knock-on effect on hedge funds driven by corporate events, which sent the Morningstar Corporate Actions Hedge Fund up 3.2% in July.

Largely positive bank stress tests in Europe, higher-than-expected corporate earnings reports and fewer credit defaults narrowed spreads, too, which helped debt-linked hedge funds. The Morningstar Debt Arbitrage Hedge Fund rose 3.1% over the same period.

Oddly, none of this good news seemed to translate into positive results for composites of hedge funds.

Morningstar's hedge fund database experienced asset outflows of $1.6 billion in June, and the Morningstar Hedge Fund of Funds Index remained in the red year to date with returns of minus-1.9%, even though at 3.3%, its performance in July alone outperformed Morningstar's 1000 HF Index.

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