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Hennessee Hedge Fund Index up 0.23% in February (+3.01% YTD), hedge funds lag equity markets as rally continues

Monday, March 11, 2013
Opalesque Industry Update – Hennessee Group LLC, a hedge fund research and consulting firm, announced today that the Hennessee Hedge Fund Index advanced +0.23% in February 2013 (+3.01% YTD), while the S&P 500 advanced +1.11% (+6.20% YTD), the Dow Jones Industrial Average increased +1.40% (+7.25% YTD), and the NASDAQ Composite Index climbed +0.57% (+4.66% YTD). Bonds fell, as the Barclays Aggregate Bond Index increased +0.50% (-0.20% YTD).

“Hedge funds posted gains for the month as equity markets continued to rally,” commented Charles Gradante, Co-Founder of Hennessee Group. “Hedge funds are positioning to participate in the current equity market rally, but continue to stay well hedged due to concerns about historically low VIX (complacency) and unresolved structural issues in the economy.”

“With equity markets near all-time highs, we are seeing more allocations into hedge funds. Many individuals feel that the equity and credit market upside is somewhat limited at this point and there are several risks that could cause markets to fall,” said Lee Hennessee, Managing Principal of Hennessee Group. “Investors are concerned about how the markets will react to the end of monetary stimulus and quantitative easing, a potential bubble in the credit markets, and the race to debase global currencies.”

Equity long/short performed well in February, as the Hennessee Long/Short Equity Index advanced +0.38% (+3.43% YTD). Broad equity markets continued to rally in the beginning of February, building on their positive momentum from January. However, markets became volatile during the second half of the month, as economic headwinds emerged, as well as uncertainty in the U.S. and Italy. Equity markets recovered and rallied into month end, approaching all-time highs. The best performing sectors were consumer staples (+3.06%), telecommunication services (+2.56%) and industrials (+2.07%). The worst performing sectors were materials (-1.74%) and energy (-0.00%). Managers were quick to reduce exposure when concerns about the European Sovereign Debt crisis began to re-surface. As a result, most managers lagged as the equity markets continued to rally into month end.

“Many equity managers feel that the market’s complacency is due to low rates and low inflation,” commented Charles Gradante. “However, many managers pointed out that the bond market could disrupt the equity market as many believe bond managers (seeking higher yields) are taking excessive risks in duration, leverage and credit, which is where they believe the next major market correction will come from.”

The Hennessee Arbitrage/Event Driven Index advanced +0.46% in February (+2.07% YTD). The Barclays Aggregate Bond Index advanced +0.50%. Yields on Treasuries were relatively flat, with the 10 Year Treasury yield declining 2 basis points to 2.00%. The high yield sector displayed some volatility, but posted gains for the month, as the Merrill Lynch High Yield Master II Index increased +0.46% (+1.85% YTD). High yield spreads widened slightly, reaching 498 basis points. The Hennessee Distressed Index increased +1.07% in February (+2.29% YTD). Distressed portfolios benefited from position specific catalysts and the broad market rally. The Hennessee Merger Arbitrage Index advanced +0.60% in February (+1.24% YTD). Managers posted modest positive gains as deal activity picked up during the month and positions in Heinz, Dell and other longs contributed to performance. The Hennessee Convertible Arbitrage Index returned -0.18% in February (+1.16% YTD). Convertible valuations were largely unchanged for the month. The primary market for convertibles was robust with a number of new issues coming to market globally.

“The Dollar Index has gained +9% since September, accounting for much of the decline in gold over that time,” commented Charles Gradante. “Gold bulls remain optimistic and are buying this dip.”

The Hennessee Global/Macro Index declined -0.25% in February. Developed markets and emerging markets were negative in February. There were renewed concerns about the European banking and sovereign debt crisis following the results of the Italian elections. Declines in Europe drove the MSCI EAFE Index to fall -1.16% (+3.98% YTD). International hedge fund managers were also positive, as the Hennessee International Index increased +0.36% (+4.58%). Emerging markets were down roughly in line with international markets as the MSCI Emerging Market Index fell -1.35% (-0.05% YTD). The Hennessee Emerging Market Index declined -0.41% (+2.51% YTD). The Hennessee Macro Index declined -1.63% for the month (+1.95%). Managers lost money short equities, long commodities, and short the U.S. dollar. The U.S. dollar surged against most major currencies, advancing +3.37% against the Euro. Commodities were negative as the S&P GSCI declined -4.4% in February (-0.22% YTD) due to uncertainties about the global economy and a stronger U.S. dollar. All commodities declined except natural gas (+2.4%) and cotton (+1.5%). Gold continued to decline, falling -4.58% for the month (-4.16% YTD), amid a stronger dollar.

Press release

www.hennesseegroup.com

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