Thu, 12/02/2009 - 06:02
The Hennessee Hedge Fund Index gained 1.10 per cent last month, its second successive positive month, while US equity markets suffered their worst January on record, according to Hennessee Group, a provider of industry data and adviser to hedge fund investors.
The S&P 500 fell 8.57 per cent in January, the Dow Jones Industrial Average by 8.84 per cent and the Nasdaq Composite Index by 6.38 per cent, and bonds also declined, with the Barclays Aggregate Bond Index slipping 0.88 per cent.
'Hedge funds had a great start to the year, led by arbitrage strategies,' says Charles Gradante, co-founder of Hennessee Group (pictured). 'While equity markets were down between 6 per cent and 10 per cent, hedge funds were up 1 per cent. On a relative basis, hedge funds outperformed by more than 10 per cent, protecting a significant amount of capital.'
'We are encouraged by the USD6.5bn that poured into mutual funds during the last week of January,' says the firm's managing principal Lee Hennessee. 'We continue to monitor fund flows and believe that if this trend continues, it could be basing and a bullish sign for equity markets.'
The Hennessee Long/Short Equity Index advanced 0.90 per cent last month. The broad equity markets declined sharply due to concerns over the contracting economy and weaker than expected earnings reports. Hedge funds have maintained low gross and net exposures, as well being overweight defensive sectors, such as health care, which was the best performing sector in January.
Managers were also able to generate significant gains on their short books. Managers profited from identifying shorts on expectations of missing earnings, as only 55 per cent of companies had met earnings expectations in January, the lowest proportion since 2001. Many focused short exposures on financials and consumer discretionary names, particularly retail.
'We have heightened concerns about the largest upsurge in unemployment in China's history,' Gradante says. 'Hennessee Group research shows that China is moving from an export- to import-driven economy, dependent on internal consumption.
'We expect China to sell dollars against the yuan to strengthen its currency in order to increase jobs and increase purchasing power of American goods. China recognises it needs to become more of a consuming economy of American goods.'
The Hennessee Arbitrage/Event Driven Index advanced 2.36 per cent in January and the Hennessee Distressed Index gained 1.30 per cent, as the spread on the Merrill Lynch High Yield Index tightened during the month.
The pace of corporate defaults has started to increase, Hennessee Group notes, with Moody's projecting that the global speculative grade default rate would reach 15 per cent this year. Credit markets outperformed equity markets as high yield bonds returned 5.80 per cent and leveraged loans 6.90 per cent, a benefit to many managers who recently increased ownership of bank debt and high yield credit.
The Hennessee Merger Arbitrage Index rose by 0.61 per cent last month. Many multiple arbitrage managers and proprietary trading desks have reduced or eliminated exposure to merger arbitrage due to deleveraging and credit concerns, but merger arbitrage-dedicated managers say deal spreads are very wide and offer an attractive risk premium. Deal flow is off to a good start to the year with transactions including Wyeth-Pfizer and Terra Industries-CF Industries and several other deals.
The Hennessee Convertible Arbitrage Index gained 5.79 per cent to become the top-performing strategy for the month. After a severe dislocation in 2008, managers benefited from a tightening of credit and a more robust secondary market in January, a trend Hennessee Group believes will continue in 2009.
The supply of convertibles has declined as new issuance has essentially shut down and convertibles continue to be retired and repurchased by companies. In addition, demand has picked up as crossover buyers have added liquidity.
'Hennessee Group began recommending higher gold allocations for their clients at USD350 and still thinks gold should be accumulated,' Gradante says. 'Gold is the one asset that is not someone else's liability.'
The Hennessee Global/Macro Index rose 0.44 per cent in January. International equities declined sharply during the month as investor risk aversion increased, with the MSCI EAFE Index falling 9.88 per cent, on a par with US markets.
The Hennessee International Index gained 0.48 per cent as managers maintained low exposures and generated alpha in stock selection. While international managers reduced global exposure during the fourth quarter, which worked to their benefit in January, European and Asian managers suffered losses amid negative backdrops.
The Hennessee Macro Index advanced 0.34 per cent as managers generated gains on short long-term Treasuries, as many expected yields to increase. One of the most popular (and crowded) trades was profitable as long-term rates increased more than 50 basis points.
Many believe that this will be a multi-year trade, but believe yields could fall on another extreme flight to quality. Many are also bullish on gold as a safe haven, hedge against the dollar and hedge against inflation. The main detractor from performance was exposure to equities, in the US and abroad.
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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