Opalesque Industry Update - Hennessee Group LLC announced today that the Hennessee Hedge Fund Index increased +1.52% in December (+12.86% YTD), while the S&P 500 gained +2.36% (+29.60% YTD), the Dow Jones Industrial Average increased +3.05% (+26.50% YTD), and the NASDAQ Composite Index jumped +2.87% (+38.32% YTD). Bonds were negative on the month, as the Barclays Aggregate Bond Index lost -0.37% (-1.82% YTD).|
"The performance of hedge funds in 2013 was underwhelming.” commented Charles Gradante, Co-Founder of Hennessee Group LLC. "The disappointment is only understood through the experience that the strategy works best when the short portfolio acts as a hedge in down markets and a generator of profits in positive markets. Not so in 2013. The equity market did not give the strategy this opportunity as there were only 2 down months in a market perceived to be fairly valued by managers. Money was lost on the short side as even stocks under financial stress rose.”
“Except for highly concentrated long/short equity hedge funds, virtually all managers in this sector suffered from too low gross and net exposures.” stated Charles Gradante. “The most frequent reason reported by managers has been that while stocks are the most attractive asset class, managers see the market as fairly valued and are finding it difficult to find stocks that have above average returns with below average risks, especially, in a market that has forged ahead despite a multitude of head winds and the greatest liquidity driven market in history.”
Equity long/short hedge funds were positive in December, as the Hennessee Long/Short Equity Index gained +2.00% (+19.28% YTD). The best performing sectors were materials (+4.58%), information technology (+4.11%), and industrials (+4.04%), while underperforming sectors were telecommunications (-0.34%), consumer staples (+0.24%) and utilities (+0.54%). The market finished 2013 with an impressive rally as easy money continued to drive financial markets. As one manager put it, 2013 “was punctuated by a positively cork-like December”. The Fed’s crafty tapering strategy calmed markets and sent them higher as we now prepare for a meager $10 billion less in quantitative easing per month. Long/short managers outperformed their hedge fund peers as good stock picking was rewarded in December.
“2013 was a year that has only happened once or twice in 50 years.” stated Lee Hennessee, Co-Founder of Hennessee Group LLC. “The S&P 500 was up over 2% in December completing the year with 10 positive months, 8 of which were up 2% or more. The last time the stock market had 8 months of 2% or more returns was 1995 (where the market had 10 months of 2% or more). Prior to 1995, we need to go back to 1958 to find a market with at least 8 months with 2% or more returns (1958 had 9 months).”
The Hennessee Arbitrage/Event Driven Index rose +1.17% in December (+10.28% YTD). The Barclays Aggregate Bond Index lost -0.37% (-1.82% YTD) as interest rates rose again in December. High yield also increased as the Merrill Lynch High Yield Master II Index increased +0.55% in December (+7.42% YTD). High yield spreads decreased rather modestly, losing 27 basis points to end the month 400 basis points over treasuries as investor’s appetite for risk continued to increase. The Hennessee Distressed Index climbed +1.96% in December (+16.16% YTD). Distressed portfolios were also helped by a strong market. The Hennessee Merger Arbitrage Index gained +0.97% in December (+7.74% YTD). Managers continued to post gains as deal spreads tightened and markets rallied. The Hennessee Convertible Arbitrage Index lost -0.07% in December (+6.68% YTD).
The Hennessee Global/Macro Index gained +1.14% in December (+6.15% YTD). The Dow Jones UBS Commodity Index reversed course and gained +1.23% (-9.58% YTD), while the MSCI ACWI Index rose +1.62% (+20.25% YTD) and the MSCI EAFE Index gained +1.41% (+19.43% YTD). The Hennessee International Index gained +1.50% (+8.74%). Gains in Sweden, Belgium, Demark, German and the UK were offset by weakness in Austria, Portugal Ireland and Israel. Emerging markets were mostly negative for December, as the MSCI Emerging Market Index lost -1.53% (-4.98% YTD), while, the Hennessee Emerging Market Index gained +0.55% (+7.16% YTD). Emerging markets continued to underperform developed markets as investors continue to see considerable growth and inflation risks in these markets. While hedge funds have significantly the long-only benchmarks, many investors continue to favor developed markets over emerging markets. The Hennessee Macro Index increased +1.21% for the month of December (-0.77% YTD).
Fixed income managers were down modestly in December as bond yields rose for the month with the 10-Year U.S. Treasury ending the month at 3.04 %, up from 2.75% in November. Commodities continued to post declines, with gold and silver dropping -4.13% and -2.63% for the month, respectively. The U.S. Dollar gained against major currencies, rising +2.80% versus the Japanese Yen, +0.08% versus the Canadian Dollar, +2.16% versus the Australian Dollar while losing -1.10% versus the Euro. Crude oil gained for the month with WTI rising +6.07% while natural gas gained +11.37% for the month.