Hedge funds post modest gains in December and are optimistic for 2009, says Hennessee
The Hennessee Hedge Fund Index gained 0.51 per cent in December, reducing the industry's average decline over 2008 to 19.15 per cent, according to Hennessee Group, a provider of industry data and adviser to hedge fund investors.
The firm notes that the S&P 500 fell by 38.49 per cent last year, the Dow Jones Industrial Average by 33.84 per cent and the Nasdaq Composite 40.54 per cent, although the Barclays Aggregate Bond Index rose 5.24 per cent.
'While the Hennessee Hedge Fund Index is down 19 per cent this year, it has outperformed equity benchmarks on a relative basis by almost 20 per cent,' says managing principal Lee Hennessee (photo).
'On a relative basis, hedge funds continue to prove themselves as an attractive asset class, generating a better risk-adjusted return than traditional money management. Investment committees are revisiting their mandates to increase allocations to hedge funds.'
Charles Gradante, the firm's co-founder, adds: 'The Fed is intent on normalising interest rate spreads between Treasury, corporate and consumer rates. According to Hennessee Group research, credit spread strategies should be one of the top performing strategies to invest for 2009.
'Credit spreads for high yield over Treasuries are currently more than 18 per cent, more than three times its average since 1990. Credit strategy managers will be able to put up some impressive gains.'
The Hennessee Arbitrage/Event Driven Index advanced 1per cent in December to finish the year down 18.57 per cent, while the Hennessee Distressed Index increased 1.27 per cent to end up down 26.30 per cent. The spread on the Merrill Lynch High Yield Index tightened from to 19.9 to 18.1 per cent after hitting an all-time high of 21.8 per cent in mid-month.
Says Gradante: 'Managers are seeing several short-term technical distressed opportunities and believe that we are on the cusp of a plethora of long-term distressed opportunities, which are likely to arise as default rates continue to accelerate over the next 12 to 18 months.'
The Hennessee Merger Arbitrage Index advanced 1.93 per cent in December and ended 2008 down just 0.87 per cent. Several managers experienced losses on the abandonment of Dow Chemical's joint venture with the Kuwait Investment Authority, calling into question Dow's ability to finance its acquisition of Rohm and Hass, a popular merger arb position.
The Hennessee Convertible Arbitrage Index gained 3.90 per cent, its first monthly advance since May, although ending the year down 20.87 per cent. Managers benefited from a tightening of credit spreads from extreme levels as well as secondary market richening and declining interest rates, a trend Hennessee Group believes will continue in 2009.
The Hennessee Long/Short Equity Index rose 0.31 per cent to end the year down 18.34 per cent. While the equity markets staged a late year rally (the S&P 500 has gained 24 per cent since November 20), hedge fund managers generally lagged as they remained well hedged and were unwilling to take any significant directional risk.
According to the firm, managers believe the current run-up in prices may have got ahead of itself and are looking for opportunities to put on new short positions. They are cautious given the sharp decline in corporate earnings and the consumer-led recession, but are finding attractive long-term opportunities on the long side. Next year should present an exceptional environment for hedge funds, the firm says, as it will lend itself to generating alpha via stock selection on both long and short sides of the portfolio.
'Year-end redemptions were significant, as the average fund returned 15 to 25 per cent of investors' assets.' Gradante says. 'Combined with negative performance and complete liquidations, the entire hedge fund industry started 2009 at close to 50 per cent of the capital it was at the beginning of 2008. However, this should be a positive for funds as less capital will be chasing the same long/short trades, which should lead to better returns.'
The Hennessee Global/Macro Index advanced 0.61 per cent in December but fell 20.72 per cent over 2008 as a whole. International equities staged a rally in December as investors took advantage of oversold conditions and increased risk, with the MSCI EAFE Index outperforming US markets with 5.92 per cent gain, although it finished the year down 45.09 per cent.
The Hennessee International Index advanced 2.76 per cent in December (ending 2008 down 21.78 per cent) as managers maintained low gross exposures into year end. The Hennessee Macro Index advanced 2.06 per cent for the month and finished up 3.37 per cent as one of the top performing strategies for the year.
Many managers expect Treasury yields to increase in 2009 as yields have plummeted and are unsustainable. One of the most popular (and crowded) trades is being short Treasuries. Many managers are bullish on commodities after a significant correction in 2008 and strong fundamentals. Managers are also bullish on gold as a safe haven, hedge against the dollar and hedge against inflation.
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.
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