Charles GradanteOpalesque Industry Update - Hennessee Group LLC, an adviser to direct hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +1.36% in April , while the S&P 500 advanced +2.85% (+8.43% YTD), the Dow Jones Industrial Average increased +3.98% (+10.65% YTD), and the NASDAQ Composite Index gained +3.32% (+8.32% YTD). Bonds advanced, as the Barclays Aggregate Bond Index increased +1.27% (+1.71% YTD) and the Barclays High Yield Credit Bond Index advanced +1.55% (+5.49% YTD).
"Hedge funds are underperforming for the year as the investment environment remains challenging for alpha generation," said Lee Hennessee, Managing Principal of Hennessee Group. "While managers generated gains in long portfolios as equity markets continued to rally, shorting continues to work against hedge fund managers, detracting from performance."
"Over the past couple months, the markets have brushed off negative news, including conflict in the Middle East, rising oil prices, S&P downgrading U.S. debt, and lower than expected GDP. Markets have continued to rally with the Russell 2000 hitting an all time high and the NASDAQ reaching a 10 year high," commented Charles Gradante, Co-Founder of Hennessee Group. "Some managers feel that the government's monetary policy and stimulus is distorting asset prices and encouraging risk taking. The markets may be underestimating the amount of risk in asset prices, credit spreads and other factors."
Solid corporate profits and prospects for continued low interest rates led to broad based gains in the equity markets in April. The Hennessee Long/Short Equity Index advanced +1.55% in April (+4.33% YTD). While managers were able to generate gains during the month, they continued to suffer from short positions and hedges and lagged on a relative basis. While large-cap stocks outperformed small caps stocks in April, the Russell 200 Index rose a solid +2.6% and reached a new all time high during the month.
From a sector perspective, nine out of the ten sectors experienced gains. Health care rose an impressive +6.4%, buoyed by a combination of better than expected profit growth and increased merger activity. Despite increasing commodity costs and concerns regarding potential margin compression, stocks within the consumer staples sector were up a solid +5.1% in April. Financials (-0.1%) were the sole sector to experience losses during the month as a number of major banks disappointed during earnings season. While managers are encouraged by the solid earnings reports, ongoing accommodative policies and reasonable valuations, they remain cautious as there are a number of headline risks (sovereign debt, inflation, geopolitical unrest, etc.) that could derail the equity markets in the near term.
"We are seeing more managers favor large capitalization, multinational companies," commented Charles Gradante. "Large cap, multinational companies have underperformed significantly in recent years and are currently selling at attractive valuations relative to small and mid cap stocks. In addition, many of these companies have large exposure to rapidly growing emerging economies, which will provide good growth opportunities."
The Hennessee Arbitrage/Event Driven Index advanced +0.85% in April (+4.47% YTD). Credit markets rallied with the Barclays Aggregate Bond Index increasing +1.27% (+1.71% YTD). High yield bonds also rallied, returning +1.55%, as yields declined. High yield bonds were yielding +6.83% at month end, 24 bps tighter for the month and 72 bps tighter for the year. The Hennessee Distressed Index increased +0.93% in April (+5.57% YTD).
Managers benefited from the market rally while hedges detracted from performance. For the second month in a row, there was only one company that defaulted in the leveraged credit markets. Managers state that accommodative capital markets will keep defaults low and many are expecting the default rate to fall to as low as 1% in 2011.
The Hennessee Merger Arbitrage Index advanced +0.95% in April (+3.54% YTD). Managers generated gains as spreads tightened and equity markets continued to rally. Deal activity has picked up thus far in 2011, and managers expect it to continue as most investment grade companies are able to issue debt in the low single digit range and have $1 trillion of cash on their balance sheets. The Hennessee Convertible Arbitrage Index returned +0.171% (+4.40% YTD) in April.
Convertibles closed the month slightly cheaper as volatility declined significantly. The new issue market and secondary trading were very quiet in April resulting in a somewhat uneventful month.
"Gold, silver and oil were strong performers in April," commented Charles Gradante. "While silver and gold experienced a correction over the last few days, most managers believe silver and gold will continue to increase until there is evidence of a rise in interest rates, which would strengthen the dollar."
The Hennessee Global/Macro Index advanced +1.78% in April (+2.01% YTD). Global equity markets rallied with the MSCI EAFE returning +6%, its best monthly performance this year. Despite investors worries about inflationary pressures in major emerging market economies, equities rose in April, with the MSCI Emerging Market Index returning +2.8%. However, a significant amount of the gains in foreign equities was due to a substantial decline in U.S. dollar, as gains were less in local currency terms. The U.S. Dollar Index fell -3.9% last month. Hedge funds were positive, with the Hennessee International Index increasing +1.40% (+2.74% YTD) and the Hennessee Emerging Market Index increasing +2.28% (+3.38% YTD). The Hennessee Macro Index gained +1.45% for the month (+0.39% YTD).
Macro managers posted gains as risk assets rallied, commodities rose strongly, and the dollar weakened. The dollar weakening was a key theme in April reaching levels not seen since 2008. Several managers were caught in a short term long dollar trade and experienced losses. Longer term, most believe the dollar is going to continue to weaken. Oil rallied strongly during the month as investors remain concerned about tension in the Middle East.
Precious metals continued to rally with gold increasing +8.1% (+9.3% YTD), reaching another record high, and silver advancing +28% (+56.9% YTD).