9 Dec 2010
Hennessee Group has announced that the Hennessee Hedge Fund Index advanced +0.32% in November (+7.12% YTD), while the S&P 500 declined -0.23% (+5.87% YTD), the Dow Jones Industrial Average declined -1.01% (+5.54% YTD), and the NASDAQ Composite Index decreased -0.37% (+10.10% YTD). Bonds also fell as the Barclays Aggregate Bond Index declined -0.57% (+7.70% YTD).
The US equity markets held up relatively well in November despite a late month sell-off sparked by renewed fears of a sovereign debt crisis and its potential impact on the global economy. The Hennessee Long/Short Equity Index advanced +0.71% in November (+6.09% YTD). While large capitalization US equities were effectively flat on the month, smaller capitalization equities rallied, as highlighted by the Russell 2000 index, which closed up +3.4% for November (+16.25% YTD). From a sector perspective, the defensive oriented utilities (-3.6%), health care (-3.2%) and consumer staples (-1.4%) were the weakest performers during the month, while cyclicals, such as energy (+5.1%) and consumer discretionary (+2.4%), continued to add to their 2010 gains. Shorting remains challenging, and for some hedge funds, it has generated negative alpha in portfolios this year. Looking forward, with the S&P 500 trading at a reasonable 12.5x 2011 earnings, managers continue to see value in the equity markets and continue to deploy capital in select opportunities. Managers remain well invested with exposure levels near the higher end of average historical ranges. That said, managers remain cautious due to ongoing concerns about the sovereign debt crisis as well as a number of other major macro headwinds that they believe could threaten the near term direction and stability of the equity markets.
Arbitrage and event driven managers were basically flat in November, as the Hennessee Arbitrage/Event Driven Index advanced +0.26% (+9.99% YTD). Fixed income markets declined in November with the Barclays Aggregate Bond Index falling -0.57% (+7.70% YTD) and the BofA Merrill Lynch U.S. High Yield Index decreasing -1.08% (+13.20% YTD). The corporate bond market saw credit spreads widen by 19 basis points to close the month at 644 basis points over treasuries. The Hennessee Distressed Index increased +0.41% in November (+10.32% YTD). Distressed managers experienced gains from several event driven opportunities, which were largely offset by losses in long positions as markets declined. Distressed managers remain heavily invested in post-reorganization equities with optimistic expectations for next year, despite somewhat lackluster performance this year. The Hennessee Merger Arbitrage Index declined -0.48% in November (+4.75% YTD). Merger arbitrage managers experienced losses after Canada blocked BHP’s proposed takeover of Potash, a widely held position. Managers remain optimistic that attractive valuations and high cash reserves will lead to more acquisitions. In addition, managers are encouraged by the return of private equity buyers in several recent acquisitions. The Hennessee Convertible Arbitrage Index declined -0.93% (+9.01% YTD) in November. During the month, positive contributions from secondary market improvement and security selection were offset by widening credit spreads and higher interest rates. Managers were encouraged to see robust new convertible issuance in November, including a large convertible preferred from General Motors.
The Hennessee Global/Macro Index declined -0.61% in November (+5.98% YTD). The international equity markets declined in November as the MSCI World Index lost -2.35% (+2.15% YTD) for the month. Losses were driven by European markets, which sold off significantly after sovereign debt fears reemerged in Ireland as well as Spain and Portugal. The Hennessee International Index fell -0.05% for the month (+9.04% YTD) while the Hennessee Emerging Markets Index lost -1.50% (+8.92% YTD). The Hennessee Macro Index declined -1.02% for the month (+3.32% YTD). Managers experienced losses as most were positioned long “risk assets”. The U.S. dollar strengthened relative to the euro, which declined on sovereign debt fears. Despite recent strength, most expect the Fed’s actions to weaken the dollar long term. Despite the U.S. dollar strength, commodities rallied sharply before experiencing a correction. They finished the month with gains as the Reuters/Jefferies CRB Index advanced +0.75% (+7.02% YTD). Precious metals continue to perform well, with silver reaching a 30-year high and gold reaching a new nominal high before correcting. While the energy sector was relatively unchanged, managers are becoming increasingly bullish on oil as demand looks to exceed supply and the dollar should continue to weaken.
“Hedge funds were slightly positive in November while traditional markets declined amid renewed European debt fears,” commented Charles Gradante, Co-Founder of Hennessee Group. “In general, hedge fund managers feel frustrated with their performance as they have not been able to capitalize on moves within what has been a range bound market. Many have commented that the year 2010 is shaping up to be a macro event driven market, leaving few opportunities to profit on fundamentals.”
“Hedge funds were basically flat in November,” said Lee Hennessee, Managing Principal of Hennessee Group. “Hedge funds increased exposures coming into the month to take advantage of a continued market rally. While most funds experienced gains at the beginning of November , they ended up giving most profits back when the markets corrected mid-month.”
The US equity markets held up relatively well in November despite a late month sell-off sparked by renewed fears of a sovereign debt crisis and its potential impact on the global economy. The Hennessee Long/Short Equity Index advanced +0.71% in November (+6.09% YTD). While large capitalization US equities were effectively flat on the month, smaller capitalization equities rallied, as highlighted by the Russell 2000 index, which closed up +3.4% for November (+16.25% YTD). From a sector perspective, the defensive oriented utilities (-3.6%), health care (-3.2%) and consumer staples (-1.4%) were the weakest performers during the month, while cyclicals, such as energy (+5.1%) and consumer discretionary (+2.4%), continued to add to their 2010 gains. Shorting remains challenging, and for some hedge funds, it has generated negative alpha in portfolios this year. Looking forward, with the S&P 500 trading at a reasonable 12.5x 2011 earnings, managers continue to see value in the equity markets and continue to deploy capital in select opportunities. Managers remain well invested with exposure levels near the higher end of average historical ranges. That said, managers remain cautious due to ongoing concerns about the sovereign debt crisis as well as a number of other major macro headwinds that they believe could threaten the near term direction and stability of the equity markets.
“We are seeing more managers with a long term negative outlook on the US markets. However, many are still maintaining significant positive net long exposure levels,” commented Charles Gradante. “This is because the Fed continues to push investors farther out along the risk curve, which should help drive up stock prices. That said, with earnings announcements largely done until next year, macro events have the ability to shake the markets, as we witnessed in November with renewed concerns about European debt levels. While managers are currently positioned for short term bullishness, many are longer term bears and are looking to build positions that would profit from a decline.”
Arbitrage and event driven managers were basically flat in November, as the Hennessee Arbitrage/Event Driven Index advanced +0.26% (+9.99% YTD). Fixed income markets declined in November with the Barclays Aggregate Bond Index falling -0.57% (+7.70% YTD) and the BofA Merrill Lynch U.S. High Yield Index decreasing -1.08% (+13.20% YTD). The corporate bond market saw credit spreads widen by 19 basis points to close the month at 644 basis points over treasuries. The Hennessee Distressed Index increased +0.41% in November (+10.32% YTD). Distressed managers experienced gains from several event driven opportunities, which were largely offset by losses in long positions as markets declined. Distressed managers remain heavily invested in post-reorganization equities with optimistic expectations for next year, despite somewhat lackluster performance this year. The Hennessee Merger Arbitrage Index declined -0.48% in November (+4.75% YTD). Merger arbitrage managers experienced losses after Canada blocked BHP’s proposed takeover of Potash, a widely held position. Managers remain optimistic that attractive valuations and high cash reserves will lead to more acquisitions. In addition, managers are encouraged by the return of private equity buyers in several recent acquisitions. The Hennessee Convertible Arbitrage Index declined -0.93% (+9.01% YTD) in November. During the month, positive contributions from secondary market improvement and security selection were offset by widening credit spreads and higher interest rates. Managers were encouraged to see robust new convertible issuance in November, including a large convertible preferred from General Motors.
“Some hedge fund managers are becoming more bullish because they see the trade deficit with China declining. Inflation in China is surging, with annualized CPI growing +4.4% in October. This is due to China's currency being pegged to a declining dollar,” commented Charles Gradante. “These managers believe that China will loosen the US dollar peg more than the market expects, pushing US stocks higher and benefiting the Chinese currency.”
The Hennessee Global/Macro Index declined -0.61% in November (+5.98% YTD). The international equity markets declined in November as the MSCI World Index lost -2.35% (+2.15% YTD) for the month. Losses were driven by European markets, which sold off significantly after sovereign debt fears reemerged in Ireland as well as Spain and Portugal. The Hennessee International Index fell -0.05% for the month (+9.04% YTD) while the Hennessee Emerging Markets Index lost -1.50% (+8.92% YTD). The Hennessee Macro Index declined -1.02% for the month (+3.32% YTD). Managers experienced losses as most were positioned long “risk assets”. The U.S. dollar strengthened relative to the euro, which declined on sovereign debt fears. Despite recent strength, most expect the Fed’s actions to weaken the dollar long term. Despite the U.S. dollar strength, commodities rallied sharply before experiencing a correction. They finished the month with gains as the Reuters/Jefferies CRB Index advanced +0.75% (+7.02% YTD). Precious metals continue to perform well, with silver reaching a 30-year high and gold reaching a new nominal high before correcting. While the energy sector was relatively unchanged, managers are becoming increasingly bullish on oil as demand looks to exceed supply and the dollar should continue to weaken.
