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“Hedge funds were positive in March as long positions performed well. The markets remain in ‘risk-on’ mode,” commented Charles Gradante, Co-Founder of Hennessee Group. “The start of 2013 is reminiscent of last year. Managers are cautious as the second quarter has been a challenging period for investing in last couple years.”

“Hedge funds posted positive performance in the first quarter, but lagged equity markets which rallied sharply,” said Lee Hennessee, Managing Principal of Hennessee Group. “The low volatility environment has allowed managers to increase exposures and participate in the rally.”

Equity long/short performed well in March, as the Hennessee Long/Short Equity Index advanced +2.37% (+5.88% YTD). Broad equity markets continued to rally, building on their positive momentum from January and February, and reaching all time highs. The best performing sectors were healthcare (+6.24%), utilities (+5.13%), and consumer discretionary (+4.76%). The worst performing sectors were energy (+1.85%) and industrials (+2.11%). The IPO market was strong with first quarter volume of $7.6 billion and 31 deals with a market cap over $50 million. The performance from IPO stocks were a contributor to performance as the average IPO returned 18%, versus 8% for the market. Stimulus and quantitative easing continues to provide a tailwind for equities. Managers have increased their net exposures, but remain concerned about the removal of stimulus and weaker than expected economic data.

“The Dow was up +8% in the first quarter. This has happened 12 times in history,” commented Charles Gradante. “In eight of those times, the Dow was up at least +1% in the second quarter. Five times the Dow was up more than +5%. Many managers think the first half of 2013 is going to be positive, baring a macro event.”

The Hennessee Arbitrage/Event Driven Index advanced +1.55% in March (+3.62% YTD). The Barclays Aggregate Bond Index advanced +0.08% (-0.12% YTD). Yields on Treasuries were relatively flat, with the 10 Year Treasury yield declining 2 basis points to 1.87%. The Merrill Lynch High Yield Master II Index returned +1.03% (+2.90% YTD). High yield spreads declined 2 basis points to 496 basis points over treasuries. The Hennessee Distressed Index increased +1.47% in March (+3.79% YTD). Distressed portfolios benefited from position specific catalysts and the broad market rally. The Hennessee Merger Arbitrage Index advanced +1.27% in March (+2.53% YTD). Managers posted modest positive gains as M&A activity continued with transactions in T-Mobile acquiring MetroPCS, Liberty Global bidding for Virgin Media, and the Sprint Nextel-Clearwire deal. The Hennessee Convertible Arbitrage Index returned +0.53% in March (+1.69% YTD). Managers experienced gains as risk taking continued and spreads tightened slightly. Asia Pacific convertibles were strong performers.

“Banks in Cyprus were closed for an extended period in March, as parties negotiated a bailout for the EU member's banking system in order to avoid a collapse,” commented Charles Gradante. “The issues in Cyprus were a reminder that the Euro situation is far from resolved.”

The Hennessee Global/Macro Index advanced +0.50% in March (+4.24% YTD). Global financial markets continued to rally through March, extending their gains, as developed markets outperformed emerging markets. The MSCI EAFE Index rose +0.39% (+4.38% YTD). European gains in U.K. and Germany were offset by declines in Italy, Spain and Russia. Banks in Cyprus were closed for an extended period in March, as parties negotiated a bailout for the banking system to avoid a collapse. Japan continued to lead Asia markets, and is one of the best performing global markets for 2013, with the Nikkei gaining over +7% for the month and +19% for the first quarter. International hedge fund managers were also positive, as the Hennessee International Index increased +1.21% (+5.84%). Emerging markets were down as the MSCI Emerging Market Index fell -1.87% (-1.92% YTD). Emerging market hedge funds also struggled as the Hennessee Emerging Market Index declined -0.13% (+2.37% YTD). The Hennessee Macro Index advanced +0.30% for the month (+2.26%). In currencies, the U.S. dollar continued to gain against the Euro, British Pound, and Japanese Yen. Macro managers continue to be long the U.S. dollar and short the Japanese Yen. Some managers are targeting a yen of 120 (98 currently). In the fixed income market, U.S. yields and credit spreads were down slightly, resulting in a steeper yield curve. Managers profited from equity positions in the U.S. and Japan. Commodities were positive for the month, led by gains in natural gas, oil, gold, and cotton.

Hennessee Indices

Press Release

BM