Hedge funds recovered much of the ground from their losses the previous month with a 2 per cent average gain in April, according to Hennessee Group, an adviser to hedge fund investors and
Hedge funds recovered much of the ground from their losses the previous month with a 2 per cent average gain in April, according to Hennessee Group, an adviser to hedge fund investors and provider of indices and other industry data.
The recovery in performance came against the backdrop of an even steeper rebound for US equity markets, with the S&P 500, Dow Jones Industrial Average and Nasdaq Composite indices rising by 4.75 per cent, 4.54 per cent and 5.87 per cent respectively.
The Lehman Aggregate Bond Index declined by 0.21 per cent but is up by 1.95 per cent for the year to date, in contrast to the equity and hedge fund indices, which remain in negative territory for the first four months of 2008.
‘Hedge funds lagged the overall markets in April, as is expected given the recent surge in equities,’ says managing principal E. Lee Hennessee. ‘That said, most managers are fearful of a recession, as conversations have changed from whether there will be a recession to how deep and prolonged it will be.’
The Hennessee Long/Short Equity Index gained 2.02 per cent in April, albeit still down 2.92 per cent so far in 2008, as equities continued the advance that followed the buyout of Bear Stearns in March.
However, most long/short equity funds remain conservatively positioned, believing that the financial and housing crisis of the past nine months are likely to translate into substantially slower economic growth and that sell-side earnings estimates are generally high for the remainder of 2008.
‘The Hennessee Group is concerned about the conditions in the Dutch auction rate securities market,’ says the firm’s other managing principal, Charles Gradante. ‘A seminal event is developing. Sellers have continuously overwhelmed buyers, causing widespread auction failures for the first time in 25 years.
‘Banks, which normally provide liquidity during periods of supply/demand imbalances, are not doing so, adding to the list of concerns about bank balance sheets. Hedge funds are looking at opportunities in this market that are well collateralised.’
The Hennessee Arbitrage/Event Driven Index advanced 1.42 per cent in April and the Distressed Index rose by 1.28 per cent, although they are down 1.39 per cent and 1.55 per respectively for the year so far.
Despite the bankruptcy filings of US several airlines and retailers, high-yield credit spreads tightened substantially from 8.2 per cent to 6.9 per cent over Treasuries. Most credit managers believe that defaults will continue to increase and that high-yield debt will continue to sell off, and therefore are holding high levels of cash.
The Hennessee Merger Arbitrage Index rose 1.87 per cent and is now down just 0.21 per cent in 2008. Merger spreads tightened as a result of reduced volatility in the equity markets and the more accommodating credit markets provided better financing options for leveraged buyouts and cash takeovers.
The Hennessee Convertible Arbitrage Index gained 0.60 per cent last month, reducing its decline for the year so far to 1.55 per cent. Credit-related gains were offset by volatility-related losses as the VIX declined from 25.6 to 20.8.
‘Spreads on oil contracts, which were wide and are now tightening, indicate speculators are topping out,’ Gradante says. ‘Just three months ago, oil was at USD86. The 50 per cent run-up has a lot of speculation in it.
‘Hennessee Group’s research indicates that Brazil’s three-month rate of 11.6 per cent continues to attract money flows, while the real is expected to hold its own against the dollar. The real is up 16.7 per cent versus the dollar in the last twelve months, and Standard & Poor’s recently upgraded Brazilian debt to investment grade.’
The Hennessee Global/Macro Index rose 2.23 per cent in April but remains down 1.52 per cent for the year. International equities rose along with those in the US, with the MSCI EAFE Index gaining 4.95 per cent, and returns were stronger in emerging than in more developed markets.
The Hennessee International Index rose 2.60 per cent for the month but is down 1.68 per cent to date in 2008, while the Hennessee Macro Index gained 1.57 per cent for the month and is up 3.17 per cent so far this year. Commodities resumed their recent surge with oil prices rising to USD120 per barrel. The lone exception was gold, which declined from USD904 to USD867, but this is widely believed to reflect a seasonal adjustment in demand.
The Hennessee Hedge Fund Indices are calculated from performance data reported to the Hennessee Group by a diversified group of more than 1,000 hedge funds. The Hennessee Hedge Fund Index is an equally-weighted net of fees and unaudited average of the funds in the indices, derived from the group’s database of more than 3,500 hedge funds.
