Opalesque Industry Update: Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index increased +0.06% in June (+2.10% YTD), while the S&P 500 gained +3.96% (+8.66% YTD), the Dow Jones Industrial Average advanced +3.93% (+5.42% YTD), and the NASDAQ Composite Index increased +3.81% (+12.66%). Bonds were also up, as the Barclays Aggregate Bond Index increased +0.04% (+2.37% YTD) and the Barclays High Yield Credit Bond Index increased +2.11% (+7.26%).|
“It looked like June was going to be another poor month for risk assets until the last trading day of the month. The agreement from European Union leaders towards a future banking union resulted in a short-covering rally,” commented Charles Gradante, Managing Principal of Hennessee Group. “The markets continue to be macro driven. Trading volume is down, volatility is up, correlation is high, and macro events are driving price swings. It remains a challenging environment for security selection. Most managers are not trying to time the market, as it is difficult to do consistently. Most are conservative, trying to generate alpha in specific opportunities.”
“Hedge funds lagged in June as traditional benchmarks posted strong positive performance. The majority of gains came at the end of the month as investor sentiment improved on the hope for stability in Europe. Hedge funds did not participate in the rally due to conservative exposures and suffered losses due to short covering. ” said Lee Hennessee, Managing Principal of Hennessee Group. “For the year, hedge funds are underperforming traditional equity benchmarks.”
Equity long/short managers posted modest positive performance, as the Hennessee Long/Short Equity Index advanced +0.63% (+2.58% YTD). After a relatively calm start to the year, the Dow posted twenty-two days of triple-digit moves during the second quarter, compared with just six in the first quarter. Equity market volatility continued in June as the S&P 500 ended the month with a gain of nearly 2.5%, bringing the monthly return to +4%. Hedge fund managers started June with conservative exposures after the sharp selloff in May. As a result, hedge funds failed to participate in the market rally. Looking to July, managers expect volatility to continue as we enter second quarter reporting season, but are optimistic as earnings releases should lead to more dispersion among securities. Managers are seeing opportunities as equity valuations appear cheap. The S&P 500 is trading at a price-to-earnings multiple of less than 13. Although expectations for earnings have come down, many remain bullish on corporate profits. However, there are plenty of longer term concerns. While Europe remains a worry for markets, focus seems to have shifted to the U.S., where investors are concerned about whether a political stalemate will dictate performance during the second half of the year. With government policy affecting financial markets, investors are nervous about the November elections and the year-end “fiscal cliff” of tax cuts and economic stimulus that could drive the U.S. economy into recession.
“Some pundits are saying that a ‘perfect storm’ is developing due to stalled growth in the United States, the European debt crisis, a slowdown in China, and military conflict in Iran,” commented Charles Gradante. “But many managers are taking a contrarian point of view, stating that this scenario is already built into stock prices. By any measure, stocks are cheap. The S&P 500 is currently trading at a price-to-earnings (PE) ratio of 12.8. Stocks in the United Kingdom and France now are trading at only 9.5 times 2012 earnings, the lowest in 30 years. With more than 60% of corporate sales from European firms originating internationally, investing in Europe may be around the corner.”
The Hennessee Arbitrage/Event Driven Index declined -0.28% (+3.11% YTD) in June. The Barclays Aggregate Bond Index increased +0.04% (+2.37% YTD). U.S. yields ended the month slightly higher, as the yield on the 10 Year U.S. Treasury increased 8 basis points from 1.59% to 1.67%. The spread of corporate bonds in the Barclays U.S. Aggregate index over Treasuries tightened slightly, with the average yield on the bonds reaching 3.27%. High yield credit rallied, as the spread of the BofA Merrill Lynch High Yield Master Index tightened 52 basis points from 6.96% to 6.44%. The Hennessee Distressed Index fell -1.24% in June (+2.29% YTD). Distressed funds were down for the month as core long positions and special situations declined in value. The Hennessee Merger Arbitrage Index decreased -0.64% in June (+1.93% YTD). Managers’ performance was mixed as deal spreads widened in several core positions amid heightened volatility. Global mergers-and-acquisition activity has declined due with renewed concerns about the health of global economies. The Hennessee Convertible Arbitrage Index advanced +1.02% (+5.04% YTD). Convertible arbitrage managers were marginally higher driven primarily from the tightening of credit spreads.
“Many managers booked gains in a short oil trade betting on a global slowdown. Signs of slowing global growth and a production increase by Saudi Arabia pushed prices to nine month lows. Most were able to book gains despite a sharp reversal at month end as oil jumped +8%,” commented Charles Gradante. “While many are short oil due to near term growth concerns, most are longer term bulls. Secular demand from emerging markets and the depletion of oil resources will provide upward pressure over the next decade.”
The Hennessee Global/Macro Index declined -0.99% (-0.25% YTD) in June. Throughout the month, investors were focused on events in Europe, and a victory for Greece’s pro-bailout party was well received by the markets. Global financial market volatility continued throughout June due to concerns about the European banking system. Global equity markets ended the month with broad-based gains, posting strong performance on the final trading day. The MSCI All-Country World Index advanced +6.79% in June (+0.77% YTD). Italy (+13.58%) and Spain (+20.63%) were top performers. International hedge fund managers posted small gains due to conservative positioning, as the Hennessee International Index advanced +0.20% (+2.50% YTD). Emerging markets were also positive, but underperformed the developed markets. The MSCI Emerging Markets Index gained +3.43% (+2.29% YTD). Hedge fund managers posted losses as currency exposure detracted from performance, as the Hennessee Emerging Market Index declined -1.93% (-4.79% YTD). Macro managers were down in June, as the Hennessee Macro Index decline -1.44% (-0.64% YTD). Managers experienced losses in currencies and fixed income as most were positioned for a continued “risk off” environment. Many macro funds attempt to follow trends, resulting in crowded trades and painful reversals. Those managers were whipsawed by the euro, which suffered its longest losing streak of the month only to reverse and post its biggest gain since October. The Dow Jones-UBS Commodity Index was up +5.49% for the month of June (-3.74%). However, performance among commodities was mixed, with a sharp decline in oil, significant gains in natural gas and agriculturals, and mixed performance across metals.