9 Sep 2010
Hennessee Group has announced that the Hennessee Hedge Fund Index declined -0.49% in August (+1.30% YTD), while the S&P 500 decreased -4.74% (-5.90% YTD), the Dow Jones Industrial Average fell -4.31% (-3.96%), and the NASDAQ Composite Index declined -6.24% (-6.83% YTD). Bonds advanced, as the Barclays Aggregate Bond Index increased +1.29% (+7.83% YTD).
The Hennessee Long/Short Equity Index declined –0.99% in August (+0.18% YTD). Long/short equity funds outperformed traditional benchmarks on a relative basis due to reduced exposure levels and a positive spread between the performance of long and short portfolios. After the strong gains of July, stocks retreated in August as investors digested a series of weak economic data points that suggested a double dip recession may not be entirely out of the question. Disappointing news on housing, employment, and manufacturing reminded investors of the challenges facing the economic recovery and the potential headwinds that could negatively impact corporate profits going forward. All the major equity market indices declined in August, led by the Russell 2000 Index (small cap stocks) which dropped -7.50% (-3.72% YTD), its worst August in 12 years. Sector performance in August was far more varied than the broad based gains experienced in July with financials (-7.8%), industrials (-7.0%), and technology (-7.0%) faring the worst, while defensive oriented sectors, such as health care (+4.0%), telecommunications (+2.3%) and utilities (+1.5%), holding up the best. Going forward hedge funds continue to favor those areas benefiting from the combination of global stimulus, corporate cash, and emerging markets exposure, including materials, industrials, energy, and technology, while remaining cautious on financials and health care which appear to be struggling under the weight of regulatory changes in their respective industries. Until there is more clarity on the global economic recovery, hedge funds will remain defensive with reduced net exposures while focusing on high quality companies trading at attractive valuations.
Arbitrage and event driven managers were essentially flat in August, as the Hennessee Arbitrage/Event Driven Index declined -0.04% (+4.55% YTD). During the month, fixed income markets continued to display strong positive performance as the Barclays Aggregate Bond Index advanced +1.29% (+7.83% YTD) and the BofA Merrill Lynch U.S. High Yield Index increased +0.16% (+8.54% YTD). High yield spreads widened slightly amid a flight to quality. The Hennessee Distressed Index fell -1.12% in August (+5.14% YTD). Managers experienced losses as equity markets declined and spreads widened. Managers benefited from cautious positioning and hedges which were added during the summer amid growing concerns about global economic growth. Distressed managers expect a number of new investment opportunities as $1 trillion in pending debt maturities come due between 2012 and 2015, which should prove problematic to refinance. The Hennessee Merger Arbitrage Index advanced +0.90% in August (+3.41% YTD). Merger arbitrage was one of the best performing strategies in August as the markets witnessed a flood of deal activity. Hedge funds benefited from the bidding war that unfolded between Hewlett Packard and Dell for 3Par. In addition, managers were encouraged by Intel’s proposed take over of McAfee, BHP Billiton’s offer for Potash, and Sanofi’s offer for Genzyme. Managers expect acquisitions to continue as companies have large cash balances. The Hennessee Convertible Arbitrage Index advanced +0.72% (+3.91% YTD) in August. Convertible arbitrage portfolios benefited from a positive carry, increasing volatility, and lower interest rates, while a widening of spreads detracted slightly from performance. In addition, managers who were hedged benefited as the equity markets declined sharply. Cross over and outright buyers remain supportive of convertible valuations, especially as investors continue to pursue yield.
The Hennessee Global/Macro Index advanced +0.11% in August (+0.19% YTD). As has been the case throughout 2010, the developed equity markets were the laggards during the month with the MSCI World Index down -3.9% (-7.5% YTD) while the MSCI Emerging Markets Index was off -2.1% (-2.0% YTD). Notable decliners during the month included Ireland (-15.4%), Greece (-9.3%) and Italy (-7.5%). International managers outperformed due to reduced exposures levels, strong region and stock selection, and overweight exposure to emerging markets. The Hennessee International Index advanced +1.40% for the month (+0.61% YTD). The Hennessee Macro Index advanced +0.87% for the month (+0.02% YTD). The financial markets continue to oscillate between “risk on” and “risk off” phases with August being a month of significant risk reduction after a series of disappointing U.S. economic indicators. As a result, equities declined significantly, bond prices rallied and gold approached record levels. Managers continued to lose money on their short Treasury positions, and many have been forced to cover the trade. The 10-year note's yield hit a low of 2.418% on August 25th, the lowest level since January 2009. Hedge funds remain bullish on gold as a safe haven and inflation/deflation hedge, which advanced +6.59% in August (+11.10% YTD). In addition, managers made money short global equities, which declined as investors shifted their focus away from a strong second quarter earnings season to the longer term issue of global economic uncertainty.
“Hedge funds started the month with reduced net and gross exposure levels, which allowed them to protect capital and generate ‘alpha’ as equity markets declined during the month. While managers remain cautious given the global economic uncertainty, the belief that we will likely avoid a ‘double-dip’ recession has increased among managers,” commented Charles Gradante, Co-Founder of Hennessee Group. “It was also encouraging to see that 43% of hedge funds reporting were able to generate positive performance in August as markets started to respond more to fundamentals.”
“For the year, hedge funds have been able to protect capital and generate modest positive performance despite high levels of volatility and declines in the equity markets. 85% of reporting hedge funds have outperformed the S&P 500 year-to-date,” said Lee Hennessee, Managing Principal of Hennessee Group. “In addition, many managers have an optimistic outlook on their ability to make money long and short, and feel that they are starting to be rewarded for their fundamental research on both a relative and absolute basis. However, given the skittishness of the markets and potential for extreme volatility, managers remain cautious and well hedged.”
The Hennessee Long/Short Equity Index declined –0.99% in August (+0.18% YTD). Long/short equity funds outperformed traditional benchmarks on a relative basis due to reduced exposure levels and a positive spread between the performance of long and short portfolios. After the strong gains of July, stocks retreated in August as investors digested a series of weak economic data points that suggested a double dip recession may not be entirely out of the question. Disappointing news on housing, employment, and manufacturing reminded investors of the challenges facing the economic recovery and the potential headwinds that could negatively impact corporate profits going forward. All the major equity market indices declined in August, led by the Russell 2000 Index (small cap stocks) which dropped -7.50% (-3.72% YTD), its worst August in 12 years. Sector performance in August was far more varied than the broad based gains experienced in July with financials (-7.8%), industrials (-7.0%), and technology (-7.0%) faring the worst, while defensive oriented sectors, such as health care (+4.0%), telecommunications (+2.3%) and utilities (+1.5%), holding up the best. Going forward hedge funds continue to favor those areas benefiting from the combination of global stimulus, corporate cash, and emerging markets exposure, including materials, industrials, energy, and technology, while remaining cautious on financials and health care which appear to be struggling under the weight of regulatory changes in their respective industries. Until there is more clarity on the global economic recovery, hedge funds will remain defensive with reduced net exposures while focusing on high quality companies trading at attractive valuations.
“Managers state that many high quality dividend stocks look attractive, especially relative to bonds, which many feel have extremely high duration risk. According to Bloomberg, the number of stocks paying higher dividends than bond yields is at the highest level in 15 years. Almost 15% of the S&P 500 offer dividends greater than 3.78% (the average rate in the credit markets),” commented Charles Gradante. “Managers feel it is likely that equity and debt markets will maintain an inverse relationship and trade within wide ranges until there is greater clarity around the global economic environment.”
Arbitrage and event driven managers were essentially flat in August, as the Hennessee Arbitrage/Event Driven Index declined -0.04% (+4.55% YTD). During the month, fixed income markets continued to display strong positive performance as the Barclays Aggregate Bond Index advanced +1.29% (+7.83% YTD) and the BofA Merrill Lynch U.S. High Yield Index increased +0.16% (+8.54% YTD). High yield spreads widened slightly amid a flight to quality. The Hennessee Distressed Index fell -1.12% in August (+5.14% YTD). Managers experienced losses as equity markets declined and spreads widened. Managers benefited from cautious positioning and hedges which were added during the summer amid growing concerns about global economic growth. Distressed managers expect a number of new investment opportunities as $1 trillion in pending debt maturities come due between 2012 and 2015, which should prove problematic to refinance. The Hennessee Merger Arbitrage Index advanced +0.90% in August (+3.41% YTD). Merger arbitrage was one of the best performing strategies in August as the markets witnessed a flood of deal activity. Hedge funds benefited from the bidding war that unfolded between Hewlett Packard and Dell for 3Par. In addition, managers were encouraged by Intel’s proposed take over of McAfee, BHP Billiton’s offer for Potash, and Sanofi’s offer for Genzyme. Managers expect acquisitions to continue as companies have large cash balances. The Hennessee Convertible Arbitrage Index advanced +0.72% (+3.91% YTD) in August. Convertible arbitrage portfolios benefited from a positive carry, increasing volatility, and lower interest rates, while a widening of spreads detracted slightly from performance. In addition, managers who were hedged benefited as the equity markets declined sharply. Cross over and outright buyers remain supportive of convertible valuations, especially as investors continue to pursue yield.
“Distressed managers reported that while the default rate is expected to decline significantly in 2010, slowing GDP growth should lead to another distressed cycle with the potential for unprecedented defaults. Many funds are raising additional capital to address this impending cycle,” commented Charles Gradante. “The financial markets will hit another ‘debt wall’ as companies approach debt maturities over the next few years. There is more than $1 trillion in debt coming due between 2012 and 2015 that will need to be refinanced.”
The Hennessee Global/Macro Index advanced +0.11% in August (+0.19% YTD). As has been the case throughout 2010, the developed equity markets were the laggards during the month with the MSCI World Index down -3.9% (-7.5% YTD) while the MSCI Emerging Markets Index was off -2.1% (-2.0% YTD). Notable decliners during the month included Ireland (-15.4%), Greece (-9.3%) and Italy (-7.5%). International managers outperformed due to reduced exposures levels, strong region and stock selection, and overweight exposure to emerging markets. The Hennessee International Index advanced +1.40% for the month (+0.61% YTD). The Hennessee Macro Index advanced +0.87% for the month (+0.02% YTD). The financial markets continue to oscillate between “risk on” and “risk off” phases with August being a month of significant risk reduction after a series of disappointing U.S. economic indicators. As a result, equities declined significantly, bond prices rallied and gold approached record levels. Managers continued to lose money on their short Treasury positions, and many have been forced to cover the trade. The 10-year note's yield hit a low of 2.418% on August 25th, the lowest level since January 2009. Hedge funds remain bullish on gold as a safe haven and inflation/deflation hedge, which advanced +6.59% in August (+11.10% YTD). In addition, managers made money short global equities, which declined as investors shifted their focus away from a strong second quarter earnings season to the longer term issue of global economic uncertainty.
“With the U.S. economy showing signs of anemic growth, the Fed announced additional quantitative easing measures. Managers reports that such Fed easing could pose some downside risk to the U.S. dollar. However, unsettled market conditions and the possibility of offsetting measures by the Bank of Japan or European Central Bank should prevent significant dollar weakness against the euro and yen,” commented Charles Gradante. “Managers expect the U.S. dollar to remain stable or even strengthen against other major currencies, but should weaken against commodity and emerging currencies.”
