Opalesque Industry Update – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -1.20% in June (+1.45% YTD), while the S&P 500 declined -1.83% (+5.01% YTD), the Dow Jones Industrial Average fell -1.24% (+7.23% YTD), and the NASDAQ Composite Index decreased -2.18% (+4.55% YTD). Bonds also fell, as the Barclays Aggregate Bond Index declined -0.29% (+2.74% YTD) and the Barclays High Yield Credit Bond Index decreased -0.97% (+4.98% YTD). |
“Hedge funds experienced another difficult month in June. Hedge funds were ‘whipsawed’ as markets sold off sharply before dramatically reversing course with a strong five day rally into quarter end,” commented Lee Hennessee, Managing Principal of Hennessee Group. “As the markets fell, hedge funds reduced exposures in order to limit losses and protect capital. When the markets rebounded, hedge funds failed to fully participate in the rally.”
“The ‘risk on, risk off’ theme continues to dominate risk assets, as stocks, currencies and commodities are moving in response to macro events. Concerns about the U.S. and Chinese economies, oil prices, and sovereign debt issues in Greece are driving markets and creating a difficult investment environment,” commented Charles Gradante, Co-Founder of Hennessee Group. “This year has been extremely challenging for hedge funds. Thus far this year, hedge funds are underperforming as they attempt to manage volatility and protect capital against losses.”
The U.S. equity markets finished the month with modest declines, as the S&P 500 posted a -1.83% loss. However, the loss was significantly diminished by a late month rally as Greece was able to avoid default. Large cap stocks outperformed small- and mid-cap stocks, while growth continued to outperform value. During the month, all the S&P 500 sectors were negative for the month with Financials (-2.92%), Information Technology (-2.64%) and Consumer Staples (-2.85%) declining the most. The Hennessee Long/Short Equity Index declined -1.08% (+2.63%) in June, its worst month since August 2010. Hedge funds were “whipsawed” as the markets declined -5% before reversing course in the last five trading days of the month. Hedge funds reduced gross and net exposures in order to protect capital. The lower exposure levels prevented hedge funds from bouncing back as much as equity markets during the late month rally. Managers expressed some concern about low trading volume going into quarter end. In addition, managers express frustration shorting as several momentum names with poor fundamentals continue to advance in a declining market, detracting from performance. Managers are looking to July for a better investment environment as second quarter earnings are reported, which should hopefully reward stock pickers. Most expect operating earnings to post a healthy increase over second quarter 2010 and first quarter 2011, but managers are more focused on forward guidance.
“The declining equity markets over the past two months have forced managers to become more defensive. They trimmed exposure levels and reduced leverage, consolidated into high conviction core positions, and raised cash,” commented Charles Gradante. “Most managers remain cautious. They are evaluating some key macro events, including how the U.S. will deal with the debt ceiling. While short term caution is prudent, they are increasingly optimistic if a deal gets made as we start to approach the Presidential election. Historically, it has been bullish for financial markets.”
The Hennessee Arbitrage/Event Driven Index declined -1.08% in June (+1.79% YTD). For the month, the Barclays High Yield Credit Bond Index fell -0.97% (+4.98% YTD), while the S&P/LSTA Leveraged Loan Index declined –0.65% (+1.95% YTD). Negative economic data and the debt crisis in Greece led to a 70 basis point widening of junk bonds yields after setting an all-time low in May. However, managers state that spreads of 580 basis points of Treasuries are still attractive as most expect high-yield bond and loan default rates to remain well below their long-term averages for the next few years. The Hennessee Distressed Index decreased -1.21% in June (+4.41% YTD) as portfolios declined as markets sold off. The Hennessee Merger Arbitrage Index declined –0.72% in June (+2.64% YTD). Deal spreads widened slightly as volatility picked up and markets sold off. While deal activity has slowed over the past couple months, corporate fundamentals remain strong. Companies are generating strong profits, good cash flow, and have attractive balance sheets, which should lead to more M&A activity once confidence improves. The Hennessee Convertible Arbitrage Index returned -0.87% (+2.94% YTD) in June. The U.S. convertible markets held up fairly well, especially higher quality names. Convertible managers were able to limit losses as equity shorts and increasing volatility were able to mostly offset price declines and rising interest rates.
“With the recent approval of austerity programs, Greece was able to access financing that should allow it to avoid default for a couple more years, providing a short term spark to global markets,” commented Charles Gradante. “However, without restructuring the debt, we are simply delaying the inevitable. The real interest rate on their debt exceeds the real growth rate of the economy. Under most scenarios, Greece will be unable to reduce debt levels or pay off its debt. In addition, the ECB is contracting monetary policy and raising rates when they should be expanding it given the issues in Spain, Italy and Greece. Sovereign debt issues are going to persist for several years and have the ability to have a profound impact.”
The Hennessee Global/Macro Index declined -1.58% in June (-1.63% YTD). Global markets continued to decline in June, with the MSCI All-Country World Index falling -1.5% in June (+3.0% YTD). European debt issues persisted as well as new concerns about global growth. Managers closely watched Greece as there was a key vote for austerity programs, which allowed them access to bailout funds and avoid a default. International hedge funds slightly outperformed due to conservative positioning, as the Hennessee International Index declined -1.31% (-0.28% YTD). The main factor behind emerging market performance was the concern that the global “soft patch” would spread to the emerging market economies. In June, the MSCI EM Index declined -1.9%, with China being one of the worst performers, down -4.5%. Hedge fund managers were down in line with benchmarks, as the Hennessee Emerging Markets Index fell -1.17% (-0.20% YTD).
The Hennessee Macro Index fell -1.46% for the month (-2.98% YTD). Macro managers continue to struggle as there have been few sustainable trends. Managers lost money as risk assets declined, especially commodities. The Dow Jones-UBS Commodity Index was down -6.62% (-4.24% YTD) in June. The three worst performers were wheat, cotton and crude oil, which were down -19.58%, -13.56%, and -11.65% respectively. Gold approached in highs in June, but sold off as investors took profits, ending the month with a -2% loss. Managers remain bullish on gold due to weak monetary policy and low interest rates. Currencies were also challenging as the euro strengthened despite concerns about a potential default in Greece.
Full performance table: Source