Mon, 09/03/2009 - 16:22
The Hennessee Hedge Fund Index declined by 0.78 per cent in February, although it remains positive with a bare 0.12 per cent gain so far in 2009, according to Hennessee Group, a provider of industry data and adviser to hedge fund investors.
The industry's indifferent performance in February came against a backdrop of declines in major US equity benchmarks, with the S&P 500 declining 10.99 per cent (18.62 per cent year to date), the Dow Jones Industrial Average by 11.72 per cent (19.52 per cent YTD) and the Nasdaq Composite by 6.68 per cent (12.63 per cent YTD). The Barclays Aggregate Bond Index also fell by 0.38 per cent and is down 1.26 per cent in 2009.
'Hedge funds are off to a good start in 2009,' says Hennessee Group co-founder Charles Gradante. 'Hedge funds were flat for the first two months of the year, while equity markets have declined almost 20 per cent. Hedge funds are preserving capital in down markets and generating alpha by managing exposures and perceptive stock selection.'
Lee Hennessee, the firm's managing principal (pictured), adds: 'We are encouraged by the positive performance after a challenging 2008. Conditions have improved for hedge funds. Volatility is elevated, but not extreme; dispersion among sectors and securities has increased; and the markets are responding to fundamentals (though negative fundamentals), which is allowing funds to generate profits in their short books.'
The Hennessee Long/Short Equity Index declined by 1.09 per cent and is down 0.25 per cent in 2009. The broad equity markets plummeted again in February, reaching prices not seen since 1997. Fears that the government would need to take over a significant portion of the US banking system led investors to dump risk assets.
Fundamentals continued to deteriorate as US GDP contracted 6.2 per cent in the fourth quarter, its weakest performance since 1982. Hedge funds outperformed on a relative basis, but gave back most of January's gains and are essentially flat for the year.
While managers remain conservatively positioned with historically low gross exposures, some have started to slowly increase gross exposure as markets are trading more fundamentally. Managers are generally maintaining very tight net exposures with many managers neutral or net short.
The majority of gains this year have been driven by short positions, especially in financials, consumer discretionary and industrial sectors. Several managers (especially health care and biotech managers) were hurt by their long health care exposure when President Obama released his budget proposal at month-end, which called for spending cuts and health care reform. A sharp reversal and a broad based sell off in health care stocks occurred in the last couple days of the month.
'We are increasingly seeing long/short equity managers starting to build long credit positions,' Gradante says. 'Many state that they are seeing opportunities in corporate and high-yield credit to produce equity-like returns with less risk.
'The pervasiveness of this credit theme in long/short equity portfolios is probably the most prevalent theme since we saw long/short equity funds buying credit default swaps back in 2006. The CDS trade turned out to be one of the best performing trades for equity funds in 2007.'
The Hennessee Arbitrage/Event Driven Index gained 0.05 per cent in February and is up 2.44 per cent for the year so far. Arbitrage and event-driven strategies have outperformed long/short equity and global macro strategies so far this year after a very difficult 2008.
The Hennessee Distressed Index declined 0.02 per cent in February, but remains up 1.82 in 2009 as the spread on the Merrill Lynch High Yield Index widened from 1,626 to 1,638 basis points during the month. A two-month rally in high yield credit ended in February as the Merrill Lynch index declined 3.5 per cent, giving back some of its January gains, although it remains up 1.7 per cent for the year so far.
The Hennessee Merger Arbitrage Index gained 0.24 per cent in February, bringing its advance for the year to 0.84 per cent. Managers say spreads are attractive as there is less competition in merger arbitrage, but many maintain a negative outlook on the strategy as M&A activity has fallen dramatically due to the credit crisis. Most managers are focusing on smaller, strategic cash deals in order to generate gains.
The Hennessee Convertible Arbitrage Index advanced 0.72 per cent, bringing its gain this year to 5.91 per cent. Managers generated gains from higher prices in the secondary market and from their positive carry. The gains were offset by losses attributed to a slight tightening of credit spreads and an increase in interest rates.
'We are still seeing a negative overhang from large hedge funds that imposed gates on redemptions,' Gradante says. 'We expect them to continue selling to raise cash for redemptions. However, we are also seeing some creative ways for investors to gain liquidity from gated funds.
'Most notably, there have been a series of auctions where investors can purchase fund interests in the secondary market at a discount to net asset value. This process benefits limited partners as it gives them immediate liquidity. It also benefits the fund as it eliminates the need to sell securities to fund redemptions. Hennessee Group strongly supports this activity since it provides liquidity during periods of illiquidity.'
The Hennessee Global/Macro Index declined 0.96 per cent and is down 1.50 per cent for the year. International equities declined sharply in February as investors' risk aversion increased, with the MSCI EAFE Index declining 10.54 per cent for an aggregate 2009 fall of 19.38 per cent, in parallel with US markets.
The Hennessee International Index declined 1.66 per cent for a 0.86 per cent year to date loss as managers remained conservative with low gross exposures and reduced risk. The Hennessee Macro Index declined 1.62 per cent for the month and is down 1.05 per cent in 2009.
Macro managers posted gains on gold as prices increased from USD913 to USD939 per troy ounce during the month. Gold flirted with USD1,000, but sold off at month-end due to profit-taking.
Managers also posted gains shorting long-term Treasuries, as many expected yields to increase. The yields on long-term Treasuries increased by some 13 basis points, with the 30-year increasing from 3.58 to 3.71 per cent. Managers lost money through their long exposure to US and global equities after many increased exposure, thinking equities were oversold.
'Many macro managers are betting that long term US interest rates will increase over the next 18 months,' Gradante says. 'However, the US government needs to keep rates low, especially the 10-year (used to set mortgage rates) in order to eventually provide stability to the housing market. We may see the US government buying Treasuries to effect low rates. However, this would lead to some serious long-term issues.'
He adds: 'Other issues plaguing the global markets are the levels of external foreign debt to GDP, which has already taken its toll on Iceland.'
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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