Opalesque Industry Update - Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +1.43% in February (+2.15% YTD), while the S&P 500 advanced +3.20% (+5.53% YTD), the Dow Jones Industrial Average increased +2.81% (+5.61% YTD), and the NASDAQ Composite Index climbed +3.04% (+4.87% YTD). Bonds advanced, as the Barclays Aggregate Bond Index increased +0.25% (+0.70% YTD) and the Barclays High Yield Credit Bond Index advanced +1.31% (+3.55% YTD).|
“Global equity markets posted gains for February despite heightened volatility due to civil unrest in the Middle East and North Africa. Managers benefited from modest net long exposure, but shorts and hedges detracted from performance,” commented Charles Gradante, Co-Founder of Hennessee Group. “Managers remain positive on the economy, but are closely monitoring oil markets.”
“Managers have underperformed in 2011 due to conservative portfolio positioning,” said Lee Hennessee, Managing Principal of Hennessee Group. “While most believe that the economic recovery will continue, the market’s strong rally over the past two years has priced in a lot of positive news. Thus, many managers are cautious and are willing to sacrifice some upside participation in order to be protected in case of a correction.”
The first half of February was a continuation of the market rally in January as the markets hit new post credit-crisis highs. The last couple weeks were characterized by a more volatile environment due to rising geopolitical tensions in North Africa and the Middle East. However, stocks finished the month of February with strong gains. Despite short positions and hedges largely serving as a detractor for the month, hedge funds were able to participate in the equity market rally, with the Hennessee Long/Short Equity Index advancing +1.79% in February (+2.33% YTD).
As the political unrest in the Middle East spread, many managers protected the portfolio by reducing gross exposure and going long crude oil. From a sector perspective, cyclical stocks continued to lead the way as the energy sector jumped an impressive +6.8%, benefiting from a spike in oil to the $100 level. Consumer discretionary stocks also experienced sharp gains during the month rising +5.8% (+5.0% YTD). While the S&P 500 Index is trading at a reasonable 13.8x 2011 earnings, managers remain cautious. In addition to persistent weakness in housing and employment, managers believe the geopolitical unrest overseas coupled with the rising energy and gasoline prices pose a legitimate threat to the stability of the financial markets and economy. A central concern is that any sustained increase in commodity prices could limit consumption gains, pressure margins and lead to disappointing earnings results as the year progresses.
“Many long and short equity managers have maintained and added to positions in gold and oil,” commented Charles Gradante. “These positions serve as a hedge against geopolitical unrest and longer term inflation.”
The Hennessee Arbitrage/Event Driven Index advanced +1.52% in February (+3.45% YTD). Along with a strong equity market rally, credit markets also advanced for the month. The credit market, as represented by the J.P.Morgan Global High Yield Index, saw credit spreads tighten by 28 basis points to close the month at 517 basis points over U.S. Treasuries. The Hennessee Distressed Index increased +1.71% in February (+3.95% YTD). Distressed managers posted gains as equity markets continued to rally.
The Hennessee Merger Arbitrage Index advanced +0.70% in February (+1.93% YTD). M&A activity is off to its best start since before the credit crisis. In the first two months of the year, global M&A volume has reached $435 billion, a +9% increase from 2010. A combination of new deal announcements, including the $10 billion bid by Deutsche Boerse AG for NYSE Euronext and the BP’s $7 billion bid for Reliance Industries, and spread tightening contributed to gains in February.
The Hennessee Convertible Arbitrage Index returned +1.84% (+3.83% YTD) in February. As the equity and credit markets both strengthened, the convertible bond market also closed higher on the month. Managers profited from tighter credit spreads and a pick up in volatility. Managers report that the convertible market continues to be heavily influenced by outright, crossover and high yield buyers looking for equity sensitive names.
“A potential spike in oil is one of the key short term risks. However, offsetting this is the Fed’s accommodative monetary policy, improving employment, low labor costs, and strong earnings. Absent a major spike in oil prices, a near-term recession is unlikely,” commented Charles Gradante. “As a result, managers are closely watching developments in the oil markets. If there is stability in the Middle East and a retracement of oil prices, it would be positive for equity markets.”
The Hennessee Global/Macro Index advanced +0.49% in February (+0.08% YTD). The international markets were mixed in February with the MSCI EAFE Index gaining +3.1% (+5.5% YTD) and the MSCI Emerging Markets Index falling -1.0% (-3.8% YTD). February was dominated by political unrest in North Africa and the Middle East as popular uprisings in Egypt and Tunisia spread throughout the region. Investors in emerging markets remained preoccupied with concerns about inflation, which is present in several countries. Inflation may force policymakers to tighten policy further, resulting in lower growth prospects for 2011. The Hennessee Macro Index advanced +1.24% for the month (+0.04% YTD). Managers generated gains long equities, precious metals and energy. Oil was a dominant theme in February, spiking over $100 a barrel, as political unrest caused concerns about possible supply disruptions. Short U.S. Dollar exposure contributed to positive performance as the U.S. Dollar declined against most currencies, including the Euro and British Pound, despite the positive economic data. Precious metals posted gains, with silver rallying to a 30 year high and gold closing near an all time high.