18 Apr 2011
Hennessee Group has announced that the Hennessee Hedge Fund Index advanced +0.23% in March (+2.35% YTD), while the S&P 500 declined -0.10% (+5.43% YTD), the Dow Jones Industrial Average increased +0.76% (+6.41% YTD), and the NASDAQ Composite Index fell -0.04% (+4.83% YTD). Bonds advanced, as the Barclays Aggregate Bond Index increased +0.06% (+0.43% YTD) and the Barclays High Yield Credit Bond Index advanced +0.32% (+3.88% YTD).
The Hennessee Global/Macro Index advanced +0.32% in March (+0.18% YTD). Global markets were volatile due to continued conflicts in the Middle East and the earthquake and tsunami in Japan. The trade of long developed markets and short emerging markets began to break down in March as emerging markets outperformed. Emerging market equities rose strongly in March, with the MSCI EM Index returning +5.7%, while the overall MSCI World Index declined -1.24%. Hedge funds fared similarly, with the Hennessee International Index declining -0.50% (+1.32% YTD) and the Hennessee Emerging Market Index increasing +2.55% (+1.08% YTD). Emerging market managers generated gains in long positions in Brazil, China, and Russia equities. The Hennessee Macro Index fell -1.33% for the month (-1.29% YTD). In commodities, oil and silver posted strong gains for the month. In fixed income, managers profited from weakness in the Treasuries. However, managers experienced losses long equities and short the yen.
The Hennessee Long/Short Equity Index advanced +0.23% in March (+2.58% YTD). As volatility picked up, managers became more liquid by replacing less liquid names with more liquid larger cap names. Managers were able to generate small gains for the month, while the Dow Jones Industrial Average rose +0.8% (+6.4% YTD) and the S&P 500 Index slipped -0.1% (+5.4%). Small and mid cap stocks continued to outperform with the Russell 2000 Index gaining a solid +2.4% (+7.6% YTD) while the Russell Mid Cap Index rose +2.6% (+6.6% YTD). From a sector perspective, telecom (+5.2%) and health care (+1.7%) benefited from high-profile deal making in March while energy and industrials were the top performers over the quarter led higher by rising oil prices and a recovering global economy. The more defensive sectors, such as consumer staples and utilities continued to underperform the broader market averages. Despite positive fundamentals and very accommodative monetary policies, managers remain cautious as there are a number of risks related to China, European debt, global inflation, and domestic federal spending, as well as North Africa, the Middle East, and Japan.
The Hennessee Arbitrage/Event Driven Index advanced +0.10% in March (+3.51% YTD). Credit markets were up slightly, as the Barclays Aggregate Bond Index increased +0.06% (+0.43% YTD) and the Barclays High Yield Credit Bond Index advanced +0.32% (+3.88% YTD). Managers continue to reduce credit exposure, often by selling investments that have reached price targets. In general, managers feel that credit opportunities are scarce and are very selective in adding new names, often focusing on more event driven and catalyst driven opportunities. The Hennessee Distressed Index increased +0.71% in March (+4.62% YTD). While distressed managers experienced losses as the markets sold off and investors sold less liquid securities, most were able to recoup the majority of losses as the markets rallied. The Hennessee Merger Arbitrage Index advanced +0.28% in March (+2.56% YTD). M&A activity has accelerated so far this year, with $784.1 billion in announced deals, up significantly from $637.9 billion over the same period in 2010, according to Dealogic. In March, the largest deal was AT&T’s offer to by T-Mobile for $39 billion in cash and stock. Many anticipated an increase in deal flow and expect it to continue as corporate executives and private-equity firms are sitting on $2.4 trillion in cash. The Hennessee Convertible Arbitrage Index returned +0.42% (+4.27% YTD) in March. Despite volatility in credit and equities, the convertible market traded consistently. Convertibles remained fairly well bid on any weakness. The new issue calendar picked up with $14 billion with new money inflows. Shortage of convertible bond supply continues to contribute to fairly tight conditions and support valuations.
“March was challenging as markets initially sold off sharply on escalating conflicts in the Middle East and the tragic events in Japan. However, markets were able to rally back during the last couple weeks to finish the month roughly unchanged,” commented Charles Gradante, Co-Founder of Hennessee Group. “Many hedge funds were ‘whipsawed’ as they became more defensive mid-month as risks increased, which resulted in less participation during the late month rebound.”
“Despite the many global challenges, the combination of solid earnings news, increased merger activity, and improved economic data has kept investor sentiment upbeat, and the equity markets afloat,” said Lee Hennessee, Managing Principal of Hennessee Group. “While the resiliency of the equity markets during these challenging times is encouraging, managers believe sentiment could shift at a moments notice and therefore remain cautious with below average net long exposures.”
“Inflation, monetary debasement and supply / demand imbalances remain central themes for macro managers over the longer term,” commented Charles Gradante. “Macro managers remain long precious metals, basic metals, energy, agriculture and are short the two year treasury as well as the dollar against the Swiss Franc.”
The Hennessee Global/Macro Index advanced +0.32% in March (+0.18% YTD). Global markets were volatile due to continued conflicts in the Middle East and the earthquake and tsunami in Japan. The trade of long developed markets and short emerging markets began to break down in March as emerging markets outperformed. Emerging market equities rose strongly in March, with the MSCI EM Index returning +5.7%, while the overall MSCI World Index declined -1.24%. Hedge funds fared similarly, with the Hennessee International Index declining -0.50% (+1.32% YTD) and the Hennessee Emerging Market Index increasing +2.55% (+1.08% YTD). Emerging market managers generated gains in long positions in Brazil, China, and Russia equities. The Hennessee Macro Index fell -1.33% for the month (-1.29% YTD). In commodities, oil and silver posted strong gains for the month. In fixed income, managers profited from weakness in the Treasuries. However, managers experienced losses long equities and short the yen.
“The earthquake in Japan caught a lot of macro managers off guard but they quickly reduced their long equity and short yen exposures to mitigate losses,” commented Charles Gradante. “The Yen rose to a 15 year high against the dollar. However, many managers put short Yen exposure back on and were able to recoup some losses as Yen weakened during the last couple weeks.”
The Hennessee Long/Short Equity Index advanced +0.23% in March (+2.58% YTD). As volatility picked up, managers became more liquid by replacing less liquid names with more liquid larger cap names. Managers were able to generate small gains for the month, while the Dow Jones Industrial Average rose +0.8% (+6.4% YTD) and the S&P 500 Index slipped -0.1% (+5.4%). Small and mid cap stocks continued to outperform with the Russell 2000 Index gaining a solid +2.4% (+7.6% YTD) while the Russell Mid Cap Index rose +2.6% (+6.6% YTD). From a sector perspective, telecom (+5.2%) and health care (+1.7%) benefited from high-profile deal making in March while energy and industrials were the top performers over the quarter led higher by rising oil prices and a recovering global economy. The more defensive sectors, such as consumer staples and utilities continued to underperform the broader market averages. Despite positive fundamentals and very accommodative monetary policies, managers remain cautious as there are a number of risks related to China, European debt, global inflation, and domestic federal spending, as well as North Africa, the Middle East, and Japan.
“M&A activity has started to pick up. Executives are gaining more confidence in the economic recovery and are starting to put cash to work,” commented Charles Gradante. “Over the last couple weeks, we have seen some big deals, such as the bid for T-Mobile, and big premiums, like in the National Semiconductor deal. We expect this trend to continue, and it should benefit event driven hedge fund managers.”
The Hennessee Arbitrage/Event Driven Index advanced +0.10% in March (+3.51% YTD). Credit markets were up slightly, as the Barclays Aggregate Bond Index increased +0.06% (+0.43% YTD) and the Barclays High Yield Credit Bond Index advanced +0.32% (+3.88% YTD). Managers continue to reduce credit exposure, often by selling investments that have reached price targets. In general, managers feel that credit opportunities are scarce and are very selective in adding new names, often focusing on more event driven and catalyst driven opportunities. The Hennessee Distressed Index increased +0.71% in March (+4.62% YTD). While distressed managers experienced losses as the markets sold off and investors sold less liquid securities, most were able to recoup the majority of losses as the markets rallied. The Hennessee Merger Arbitrage Index advanced +0.28% in March (+2.56% YTD). M&A activity has accelerated so far this year, with $784.1 billion in announced deals, up significantly from $637.9 billion over the same period in 2010, according to Dealogic. In March, the largest deal was AT&T’s offer to by T-Mobile for $39 billion in cash and stock. Many anticipated an increase in deal flow and expect it to continue as corporate executives and private-equity firms are sitting on $2.4 trillion in cash. The Hennessee Convertible Arbitrage Index returned +0.42% (+4.27% YTD) in March. Despite volatility in credit and equities, the convertible market traded consistently. Convertibles remained fairly well bid on any weakness. The new issue calendar picked up with $14 billion with new money inflows. Shortage of convertible bond supply continues to contribute to fairly tight conditions and support valuations.
