Opalesque Industry Update - Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +0.36% in November (+5.47% YTD), while the S&P 500 increased +0.28% (+12.61% YTD), the Dow Jones Industrial Average declined -0.54% (+6.61% YTD), and the NASDAQ Composite Index gained +1.11% (+15.55% YTD). Bonds were up, as the Barclays Aggregate Bond Index increased +0.16% (+4.38% YTD).|
“Equity markets experienced wild price swings due to concerns about fiscal policy in the U.S. and austerity measures in Europe,” commented Charles Gradante, Managing Principal of Hennessee Group. “Despite the volatility, hedge funds posted gains in November, largely due to alpha generated from stock selection and exposure adjustments. As correlation among securities has declined, the environment for stock selection has improved. That said, managers remained concerned about continuing fiscal and political uncertainty and have reduced net exposure levels.”
“Several hedge fund managers that profited from shorting sub-prime mortgages in 2007 saw value in sub-prime mortgages earlier this year and built long positions through structured products. This has been a significant profit generator in 2012 and a lot of the easy money has been made,” commented Charles Gradante. “While we have seen some profit taking in recent months, managers believe that this will continue to be a profitable trade as we continue to see mortgage quality improving. This may also be a harbinger for better economics in the housing industry. Managers expect low double digit returns as an investment not a trade.”
Equity long/short managers were up in November, as the Hennessee Long/Short Equity Index advanced +0.08% (+4.84% YTD). Following the U.S. elections, investors turned their attention to the fiscal cliff. Uncertainty about whether political parties would agree to a compromise that would avoid painful tax increase and spending cuts caused significant volatility in the equity markets. The S&P 500 ended the month up +0.28%, but was down as much as -5% intra-month. There was significant dispersion among sectors. Consumer discretionary, materials and industrials were the top performing sectors, while utilities, energy and financials were all negative. Long/short equity managers performed well as they were able to manage volatility through effective hedging and good stock selection. Many managers were able to generate alpha through shorting, which has generally been challenging in 2012.
“Once we get past the fiscal cliff, many managers are somewhat optimistic about 2013 due to an accommodative Fed, an increase in bank lending, a continued housing recovery supported by record low mortgage rates, and lower gasoline prices, which should help the consumer. In addition, a lower dollar would boost exports and low inflation supports real income,” said Lee Hennessee, Managing Principal of Hennessee Group. “GDP is growing at 2.7%, and many see the potential for GDP growth to be 3.0% next year.”
The Hennessee Arbitrage/Event Driven Index advanced +0.82% (+7.72% YTD) in November. Like the equity markets, credit markets experienced significant intra-month volatility, but ended the month positive. The Barclays Aggregate Bond Index increased +0.16% (+4.38% YTD). Treasuries were positive as yields declined and the yield curve flattened. The Barclays High Yield Credit Bond Index increased +0.80% (+14.02% YTD). Credit markets recovered during the second half of the month as optimism regarding potential resolution of the fiscal cliff emerged. High yield spreads declined less than Treasuries, as the spread of the Bank of America Merrill Lynch High Yield Master Index over Treasuries increased 2 basis points from 5.63% to 5.65%. The Hennessee Distressed Index increased +1.32% in November (+10.19% YTD). Distressed managers experienced gains in late-stage distressed and liquidation investments. Several managers also experienced gains in Europe, which is becoming a more interesting investment environment for distressed managers. The Hennessee Merger Arbitrage Index increased +1.28% in October (+4.34% YTD). Merger funds generated gains due to several deal closures and an uptick in the merger and acquisition environment. Several managers are looking at tax-related deals, including companies that will issue special dividends or have a motivation to close transactions by year end. The Hennessee Convertible Arbitrage Index advanced +0.94% (+9.67% YTD). Convertible bond valuations were relatively unchanged in November. Managers generated gains on a positive carry and volatility as credit spreads widened slightly.
“Emerging markets managers remain bullish as they conclude that emerging market equities are trading at a 20% discount to the U.S. equity market,” commented Charles Gradante. “Unlike the U.S. and Europe, most emerging market countries have the financial power to stabilize their economy if needed.”
The Hennessee Global/Macro Index increased +0.55% (+3.92% YTD) in November. The MSCI All-Country World Index ended the month up +1.09% (+11.06% YTD). In Europe, investors remain cautious of debt crisis flare-ups in Greece, Spain and Italy. However, concerns were alleviated when the finance ministers reached a formal agreement to release bailout funds to Greece. International hedge fund managers posted gains due to a net long exposure, as the Hennessee International Index gained +1.15% (+8.83% YTD). Emerging markets were also up, as the MSCI Emerging Markets Index added +1.18% (+9.89% YTD). Economic reports on China were largely positive as industrial output and retail sales rose more than expected and manufacturing activity expanded. Hedge fund managers struggled to generate gains, as the Hennessee Emerging Market Index was down -0.04% (+1.66% YTD). Macro managers were flat in November, as the Hennessee Macro Index declined -0.01% (+0.02% YTD). Macro managers continue to struggle to identify investable trends. Several managers posted losses long equities as markets sold off sharply following the election. As managers were forced to reduce exposures to limit losses, the markets rebounded, resulting in underperformance. Managers were able to generate gains long fixed income. Yield of the 10 Year Treasury fell 10 basis points from 1.72% to 1.62%, while the German Bund fell 2 basis points from 1.49% to 1.47%. Mangers were also able to generate profits as commodities rebounded from a sell off in October. The S&P GSCI gained +1.48% (+0.73% YTD). Industrial metals were a top performer due to bullish demand expectations for 2013. Economic optimism and instability in the Middle East led to an increase in energy prices as unleaded gas and Brent crude were up +4.91% and +3.09%, respectively. Precious metals were little changed in November. The U.S. dollar increased, as the U.S. Dollar Index advanced +0.71% (-0.17% YTD) against a broad basket of currencies. Managers continue to profit from a declining Japanese Yen, as the U.S. Dollar appreciated +3.1% versus the Yen.