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“Equity markets began the year with a strong rally,” commented Charles Gradante, Co-Founder of Hennessee Group. “As tail risk has diminished, investors are beginning to focus on modest positive economic data and continued support for risk assets by the Fed. The consensus is that 2013 should continue to bode well for the equity markets, providing a good backdrop for hedge funds.”

“Hedge funds performed well in January, capturing a significant portion of the market upside,” said Lee Hennessee, Managing Principal of Hennessee Group. “Recent performance reflects a shift away from a market driven by macro news flow and towards a market driven by fundamentals. This shift should benefit hedge fund managers.”

Equity long/short performed well in January, as the Hennessee Long/Short Equity Index advanced +2.81%. Financial markets in the U.S. and globally posted strong gains in January as the U.S. fiscal cliff was resolved and the U.S. debt ceiling dilemma was pushed further out on the calendar and there was increased optimism over the European sovereign debt crisis. The best performing sectors were energy (+7.59%), healthcare (+7.25%), and financials (+5.77%). While all sectors were positive, technology (+1.34%) was the worst performing sector, largely due to a continued decline in Apple (-17.04%). During the month, managers experienced gains on their long portfolio, while the short portfolio detracted from performance.

“Correlations between stocks and sectors have come down to .40, indicating that we are becoming a market of stocks as opposed a stock market,” commented Charles Gradante. “Consequently, hedge funds are reducing their use of ETFs on the short side and increasing their long/short pairs trading.”

The Hennessee Arbitrage/Event Driven Index advanced +1.59% in January. The Barclays Aggregate Bond Index declined -0.70%, largely due to a decline in Treasury prices. Yields on Treasuries increased with the 10 Year reaching 2.00%. High yield continued to perform well as the Barclays High Yield Credit Bond Index increased +1.34%. High yield spreads continued to tighten, reaching 493 basis points. Spreads are now more than 100 basis points below their long term average of 599 basis points. The Hennessee Distressed Index increased +1.21% in January. Distressed portfolios are typically long-biased, and hedge funds benefited from both a strong rally in equity markets and tighter spreads in high yield credit. The Hennessee Merger Arbitrage Index advanced +0.64% in January. Managers posted modest positive gains on positions in Dell and Allergan. Managers, with low interest rates making for lackluster deal spreads, are being selective in adding new deals. The Hennessee Convertible Arbitrage Index returned +1.34%. In January, the convertible sector richened as tightening of spreads and improved equity markets were positive drivers for convertible strategies.

“Fiscal policy, which was stimulating in its early phase, is beginning to morph into a contraction phase,” commented Charles Gradante. “The Fed still sees downside risks, elevated unemployment, and little in the way of spending increases for households and businesses. Most expect the Fed’s bond buying to continue.”

The Hennessee Global/Macro Index advanced +4.06% in January. Both developed and emerging markets were positive in January. The MSCI EAFE Index increased +5.19% as both Europe and Asia performed well. International hedge fund managers were also positive, as the Hennessee International Index increased +4.21%. Emerging markets underperformed developed markets as the MSCI Emerging Market Index advanced +1.31% with positive performance in Latin America being offset by underperformance in Asia and Africa. The Hennessee Emerging Market Index advanced +2.93%, driven by hedge funds’ exposures to Latin America, Russia and China. The Hennessee Macro Index increased +3.90% for the month. Managers positioned for a “risk on” environment benefited as equities rallied and bonds and precious metals declined. There were also some significant currency moves, including the Euro gaining against both the U.S. dollar and Swiss Franc. The Japanese Yen also continued to weaken against the U.S. dollar in response to aggressive economic stimulus measures and inflation targets and a pick-up in the short yen / long Nikkei trade. Commodities are off to a strong start, with the S&P GSCI and Dow Jones-UBS Commodities Index up +4.4% and +2.4%, respectively. Gains were led by oil, cotton, and platinum, while gold detracted from performance.

Press release

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