Opalesque Industry Update - Hennessee Group, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +1.45% in December (+6.99% YTD), while the S&P 500 increased +0.71% (+13.40% YTD), the Dow Jones Industrial Average gained +0.60% (+7.26% YTD), and the NASDAQ Composite Index advanced +0.31% (+15.92% YTD). Bonds were down, as the Barclays Aggregate Bond Index declined -0.14% (+4.23% YTD).|
“Hedge funds continued to perform well in December, adding to their gains for the year,” commented Charles Gradante, Managing Principal of Hennessee Group. “Hedge fund managers benefited from both increased exposure levels and alpha generation from security selection as high correlations continued to decline among stocks with attractive and unattractive valuations. The fourth quarter was the best quarter of the year for hedge funds as they outperformed the S&P by more than +2.5% on an absolute basis (+1.70% versus -1.01%).”
“2012 was another year where global markets were driven by macro news. Global stimulus outweighed renewed concerns about the European sovereign debt crisis, a global economic slowdown, and political uncertainty in the U.S. Fears of a recession declined dramatically and risk assets rallied,” commented Charles Gradante. “Hedge funds posted a respectable year, but underperformed broad equity markets due to conservative positioning early on. During the first quarter, below-average exposures led to reduced up-market capture. In May, European worries resurfaced in a dramatic sell off, resulting in a reduction of risk and leading to underperformance in the relief rally that followed. However, the last six months have been encouraging. Despite volatile macro events, such as political uncertainty and fiscal cliff in the U.S., managers were able to capture a good portion of upside and generated alpha, which bodes well for our outlook for hedge fund performance in 2013.”
Equity long/short managers were up in December, as the Hennessee Long/Short Equity Index advanced +0.84% (+5.82% YTD). The looming fiscal cliff put pressure on equity markets, but all markets were able to add to their gains for the year in December. During the month, the best performing sectors were financials (+4.59%), materials (+2.89%) and industrials (+2.26%). There was significant dispersion as several sectors were negative, including consumer staples (-2.54%), telecom (-1.09%) and healthcare (-0.36%). For the year, equity markets were again volatile, dominated by macro news and geopolitical events that resulted in “risk on” or “risk off” investing. Despite some resolution of the ‘fiscal cliff’ in January, managers continue to be concerned about political uncertainty. The debt-ceiling and spending cuts will have to be addressed in the short term. In addition, the longer term fiscal situation, slowing corporate earnings, and global weakness should become areas of focus. Despite these challenges, managers are cautiously optimistic on stock prices for 2013 due to positive economic growth and continued stimulus. Hedge funds have been increasing net and gross exposures following the U.S. presidential election as there is slightly less uncertainty about the future. In addition, managers state that equities are still fairly valued at 12.6x times projected earnings and look attractive relative to other asset classes, specifically fixed-income yields.
“Investors started the year cautious and had their net exposures down at relatively low levels. They underperformed when the markets rallied +12% in the first quarter, but they performed consistent with their net exposure,” said Lee Hennessee, Managing Principal of Hennessee Group. “At the time, reduced exposures were warranted due to concerns about Europe. Managers were more focused on protecting capital in a potential sell off and were willing to miss out on upside that was driven by new stimulus efforts and not company fundamentals.”
The Hennessee Arbitrage/Event Driven Index advanced +1.61% (+9.30% YTD) in December, and was the top performing sub-strategy for the year. Credit markets experienced their first negative month since March, as the Barclays Aggregate Bond Index fell -0.14% (+4.23% YTD). Treasuries were negative as yields increased and the yield curve steepened. Confidence about a resolution of the fiscal cliff led to the yield on the 10 Year increasing 16 basis points from +1.62% to +1.78%. The Barclays High Yield Credit Bond Index increased +1.58% (+15.81% YTD). Gains came largely from price increases rather than carry. High yield spreads declined more than Treasuries, as the spread of the Bank of America Merrill Lynch High Yield Master Index over Treasuries tightened 34 basis points from 5.65% to 5.31%. The Hennessee Distressed Index increased +3.10% in December (+13.61% YTD). Distressed managers experienced gains as equity markets rallied and had contributions from late-stage bankruptcies and post-reorg positions. The Hennessee Merger Arbitrage Index increased +1.85% in December (+6.26% YTD). Merger funds generated gains amid a robust M&A environment and several special dividend investments. Global deal volume reached $2.6 trillion in 2012, roughly in line with volume in 2011. In December, managers benefited from several new deals, including ICE’s $8.2 billion acquisition of the New York Stock Exchange and Sprint’s $2.2 billion acquisition of Clearwire. The Hennessee Convertible Arbitrage Index advanced +0.71% (+10.46% YTD). Convertible arbitrage managers benefited from positive equity markets and tighter credit spreads.
“Despite the pressure on gold and silver bullion prices during December, many managers believe that there are several positive factors supporting a bullish case for precious metals in 2013,” commented Gradante. “Printing of money on a global basis in an effort to keep interest rates low and debase currencies combined with economic weakness, the need for diversification by central banks, and supply constraints should lead to higher prices for precious metals in 2013. A number of macro managers are bullish on gold reaching over $2,000 an ounce in 2013.”
The Hennessee Global Macro index increased +2.29% (+6.21% YTD) in December. Global equities posted gains, as the MSCI All-Country World Index ended the month up +2.14% (+13.43% YTD), led by China, Japan, and Russia. International hedge fund managers posted gains, as the Hennessee International Index gained +1.95% (+10.95% YTD). Emerging markets were also up, as the MSCI Emerging Markets Index added +4.78% (+15.15% YTD). China stocks staged an unexpected December rally, increasing +15%. Hedge fund managers were also positive, but lagged the benchmark due to conservative positioning, as the Hennessee Emerging Market Index was up +3.49% (+5.20% YTD). Macro managers were up in December, as the Hennessee Macro Index increased +1.26% (+0.92% YTD). December was a good month for macro managers, marking the end of a challenging year as managers struggled to identify investable trends. In December, most managers were positioned for a rally in risk assets on the expectation of positive resolution of the U.S. fiscal cliff. During the month, managers generated gains in fixed income as U.S. yields rose for most maturities in anticipation of the fiscal cliff resolution, while high yield credit continued to tighten. Managers continued to benefit from the sharp rise of the U.S. dollar versus the Japanese Yen following Japanese elections and in anticipation of continued stimulus from the Bank of Japan. The U.S. dollar fell against the Euro on positive news regarding the European banking & sovereign debt crisis. In commodities, gold and most metals declined while oil posted gains.