Opalesque Industry Update - Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index increased +0.97% in August (+3.82% YTD), while the S&P 500 gained +1.98% (+11.85% YTD), the Dow Jones Industrial Average advanced +0.63% (+7.15% YTD), and the NASDAQ Composite Index increased +4.34% (+17.73% YTD). Bonds were also up, as the Barclays Aggregate Bond Index increased +0.07% (+3.86% YTD) and the Barclays High Yield Credit Bond Index increased +1.17% (+10.58% YTD).
“Hedge funds benefited from the rally in risk assets, as many funds strategically increased net exposure in July,” commented Charles Gradante, Managing Principal of Hennessee Group. “While hedge funds are mindful of risks related to the ongoing European banking and sovereign debt crisis, they have become more comfortable with the short-term outlook and have increased their risk tolerance.”
“Hedge funds continue to learn a hard lesson. ‘Don't fight the Fed… Regardless of Fundamentals’ should be the bumper sticker for this market. Sitting in cash, being defensive and waiting for the other shoe to drop has been a poor strategy during the last 12 months,” commented Charles Gradante. “Hedge fund managers remain reluctant to increase risk taking before improvement of fundamentals. They are also reluctant to change their investment philosophy in order to chase returns. However, as the fourth quarter is rapidly approaching, we will see more managers under pressure to generate performance and we could see equity markets continue to rally.”
“The majority of hedge fund strategies were positive in August, the third positive month in a row. Long/short equity, credit and event driven managers all performed well, while short-biased and Asia-Pacific were laggards” said Lee Hennessee, Managing Principal of Hennessee Group. “Hedge funds continue to lag equity markets for the year, as many failed to participate in the strong market rally of the first quarter and third quarter.”
Equity long/short managers were up in August, as the Hennessee Long/Short Equity Index advanced +1.04% (+3.75% YTD). Equities trended steadily higher and credit spreads continued to tighten. Comments made in July by European Central Bank President Draghi that the ECB would do "whatever it takes" continued to drive positive investor sentiment and direct intervention in European government bond markets became increasingly likely. In addition, expectations for further policy easing in the U.S. provided support, with the potential onset of QE3 appearing more likely in the near term. Due to seasonal factors and broker-dealer issues, trading in August was slow and displayed depressed volumes. Several managers commented that the volume is so low that a single institutional buyer can move a stock, forcing holders of short positions to cover. Managers continued to struggle on the short side of the portfolio, experiencing losses as most risk assets rallied. The S&P 500 was up +1.98% for the month, bringing year to date performance to +11.85% YTD. The best performing sectors were technology (+4.80%), consumer discretionary (+4.20%), and financials (+3.02%), while the worst performing sectors were utilities (-4.80%) and telecommunications (-2.41%). The technology-heavy NASDAQ continued its strong run, up +4.34% for the month and +17.72% for the year, primarily lead by Apple, which is up +65% for the year. Volatility continued to decline, as the VIX fell to a low of 13.45 mid-month, which resulted in losses as some were long volatility as a hedge. The best performing managers in August were either positioned with significant net long exposures or were focused on relative value as mean-reversion was effective.
“Some have concerns about risk assets as bond prices are overvalued due to interest rates that are artificially low and stocks are approaching the top of a fifteen year range. Many are concerned about the unknown long term impact of zero percent interest rates and massive quantitative easing,” commented Charles Gradante. “Despite this, we feel it is the time to be invested in alternatives. There are many events on the horizon that could reintroduce volatility to the markets, including the U.S. election, European financial issues and geopolitical events. Hedge funds are well positioned to take advantage of the market opportunities that present themselves. In addition, they are prepared to protect capital in a downturn.”
The Hennessee Arbitrage/Event Driven Index advanced +1.05% (+5.30% YTD) in August. The Barclays Aggregate Bond Index increased +0.07% (+3.86% YTD) and the Barclays High Yield Credit Bond Index increased +1.17% (+10.58%). Treasury securities dropped in price with the yield on the ten year Treasury note increasing to 1.85%. High yield performed well as the spread of the BofA Merrill Lynch High Yield Master Index tightened 18 basis points from 6.16% to 5.98%. Credit managers posted a gain despite rising yields due to spread tightening, a positive carry, and effective hedging. Many managers feel that high yield is still attractive in a slow growth, low interest rate environment. The Hennessee Distressed Index increased +1.11% in August (+5.19% YTD). Distressed managers experienced gains as risk assets increased. The Hennessee Merger Arbitrage Index increased +0.56% in August (+3.12% YTD). Merger arbitrage experienced small gains due to a rising market and positive contributions from core positions, including Hertz/Dollar Thrifty and Glencore/Xtrada. The Hennessee Convertible Arbitrage Index advanced +0.86% (+6.91% YTD). Convertible arbitrage managers experienced gains as spread tightening offset rising yields and falling volatility. The convertible markets were quiet but were bid up by a stronger environment for risk in equity and credit markets. The market for new issuance remains very quiet with $1.2 billion of deals announced in August.
The Hennessee Global/Macro Index advanced +0.78% (+2.12% YTD) in August. Global equity markets posted gains for the third consecutive month in August, with significant geographic contributions from Italy and Spain. The MSCI All-Country World Index ended the month up +1.93% (+7.55% YTD). International hedge fund managers posted gains, as the Hennessee International Index advanced +1.34% (+4.94% YTD). Investors again focused on a possible hard landing in China as key economic indicators suggested that a more significant slowdown than previously anticipated. Managers suffered losses in China growth bets as the markets declined. Emerging markets were negative as the MSCI Emerging Markets Index fell -0.54% (+3.38% YTD), mostly due to losses in China and Latin America. Hedge fund managers benefited from European positions and posted gains, as the Hennessee Emerging Market Index advanced +1.07% (-0.95% YTD). Macro managers posted gains in August, as the Hennessee Macro Index advanced +0.52% (+3.37% YTD). Macro performance was mixed. Several managers posted losses in currency as the U.S. dollar declined against the Euro and Pound, while rising against the Japanese Yen. Managers posted gains in commodities as hopes of additional quantitative easing in the US and bond buying in Europe sparked a reflation trade in many commodities, including gold and oil. Agricultural commodities, which have been big winners in previous months, were down as there was drought relief. Long stock index positions, particularly the EuroStoxx and S&P 500, positively contributed to performance in August. One of the biggest losing trades was long volatility, as the VIX continued to fall, dropping to a low of 13.45 mid-month.