By Christine Williamson

Posted: August 20, 2007, 6:01 AM EST

CHICAGO — Hedge fund performance in the second quarter was positive, with average fund performance of 5.04% for funds with more than $100 million under management, according to data from Morningstar Inc., Chicago.

But that performance trailed badly two major equity indexes for the three months ended June 30. Both the Standard & Poor’s 500 index, with a 6.28% return, and the Morgan Stanley Capital International Europe Australasia Far East index, with 6.67% beat hedge fund returns by a wide margin. By contrast, average second quarter hedge fund performance handily beat the 4.42% return of the Russell 2000 and trounced the -0.49% return of the Lehman Intermediate Government/Corporate Bond index.

Hedge fund index returns also were in positive territory in the second quarter. The Hedge Fund Research Inc. Fund Weighted Composite return was 4.77%, while the HFRI Fund of Funds Composite came in at 4.61%.

Morningstar’s hedge fund group provided Pensions & Investments with second-quarter rankings of the top performing hedge funds with more than $100 million under management in 14 categories, drawn from the universe of 8,020 hedge funds and funds of funds that reported data as of June 30.

In aggregate, Morningstar’s research showed that the best-performing hedge fund strategy was emerging markets, with an average return of 10.26% for funds with more than $100 million. Other Morningstar fund categories with good net average performance relative to market indexes included managed futures, 7.16%; equity net long exposure, 6.65%; equity variable exposure, 6.3%; and merger arbitrage, 5.67%.These strategies are well-represented among the 25 overall best performing hedge funds for the quarter in Morningstar’s database.

Emerging markets specialists dominated the top five positions in the overall ranking, two of which are China-focused funds. In first place, with a whopping 69.3% return for the quarter was the Qinhan China Fund LP, managed by Qinhan Capital Management LLC, Shanghai. In second place with 55.3% was the PharmaInvest Fund Ltd., which invests in pharmaceutical companies in global emerging markets. The fund is managed by GEM Global Equities Management SA, Nassau, Bahamas.

Third place was held by CoreVest New Frontier Partners LP fund, which returned 31.4%. The fund, managed by CoreVest Capital Management Co. Ltd., Seoul, and categorized by Morningstar as an equity variable exposure fund, focuses on investments in Asia. In fourth, with a 30% return, was the global macro Graham K4 Program fund, managed by Graham Capital Management LP, Rowayton, Conn. Another China specialist fund, the Golden China Fund, came in fifth, with 28.9%. The fund is managed by Greenwoods Asset Management Ltd., Shanghai.

Overall, equity net long funds dominated the second quarter ranking, with 13 funds among the top 25, followed by emerging markets, with four funds, and managed futures funds, with three.

The two best performing hedge funds of funds were managed by Standard Capital Partners NV, Curacao, Netherlands Antilles. They were the Rhine Alpha Fund (U.S. dollar), with a 16.3% return for the quarter, and its sister fund, Rhine Alpha (Swiss franc), which returned 15.6%. Four versions of the Permal India Holdings Ltd. fund of funds occupied the next four spots in the ranking, with returns ranging from 15.6% for the U.S. dollar A shares fund to 14.7% for the Euro B/C shares fund. The funds are managed by Permal Group Ltd., New York.

Copyright Fund China 2009.

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