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Hennessee Hedge Fund Index up +1.37 per cent in March

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Hennessee Group, a consultant and adviser to direct investors in hedge funds, has announced that the Hennessee Hedge Fund Index advanced +1.37 per cent in March (+1.09 per cent YTD).

Hennessee Group, a consultant and adviser to direct investors in hedge funds, has announced that the Hennessee Hedge Fund Index advanced +1.37 per cent in March (+1.09 per cent YTD).

The S&P 500 advanced +8.54 per cent (-11.67 per cent YTD), the Dow Jones Industrial Average advanced +7.73 per cent (-13.30 per cent YTD), and the Nasdaq Composite Index advanced +10.94 per cent (-3.07 per cent YTD). 

Bonds also advanced, as the Barclays Aggregate Bond Index advanced +3.31 per cent (+0.12 per cent YTD), led by gains in treasuries and high yield.

‘It was a challenging month for hedge funds,’ says Charles Gradante, co-founder of Hennessee Group (pictured). ‘Equity markets rallied strongly, while the market fundamentals really did not change. Most funds were caught with tight net exposures and were unable to participate in the rally. Managers were also hurt as the sectors they have been heavily short, such as financials, consumer discretionary and materials, were the sectors that rallied the strongest.’

‘Despite the underperformance in March relative to the equity benchmarks, hedge funds are still outperforming for the year,’ adds Lee Hennessee, managing principal of Hennessee Group. ‘We expect that we will continue to see volatility throughout the year.’

The Hennessee Long/Short Equity Index advanced +1.60 per cent in March (+1.01 per cent YTD). Equity markets staged a sharp rally, increasing approximately +25 per cent from their lows, as banks reported profitable operating earnings for the first two months of the year and the US government announced additional programmes to help the banking system. 

March was a challenging month for hedge funds, which entered the month with tight net exposures. Short portfolios significantly detracted from portfolios, as the rally was largely driven by the financial, consumer discretionary, and materials sectors; all sectors where hedge funds had been largely short. Technology and healthcare/biotech were bright spots for managers, as these sectors were relative outperformers. While the strong equity rally did cause short squeezes, most managers believe that the economic fundamentals remain negative and expect opportunities to generate profits in short portfolios in the near term.

‘Hennessee Group believes that hedge funds with a focus on the financial sector may potentially outperform in 2009,’ says Gradante. ‘Not only did Citigroup and Bank of America announce a profitable January and February, but the borrowings at the Fed discount window have been steadily declining. It is possible that the banking crisis of confidence can unwind as quickly as it unfolded.

‘In view of the losses pensions took in equities in 2008 relative to the performance of their bonds, pensions are now overweight bonds and underweight equities. We expect pensions to adjust their weightings and reduce bond holdings while increasing equities.’

The Hennessee Arbitrage/Event Driven Index gained +1.34 per cent in March (+3.38 per cent YTD), and continues to outperform long/short equity and global/macro strategies this year. 

Credit opportunities remain robust, with many managers increasing allocations to bank debt, high yield, and convertible bonds. 

The spread on the Merrill Lynch High Yield Index remains wide, increasing from 1,638 basis points to 1,703 basis points during the month.

The Hennessee Distressed Index advanced +0.64 per cent in March (-0.64 per cent YTD) due to a positive carry and event specific opportunities. 

The Hennessee Convertible Arbitrage Index advanced +3.30 per cent (+9.52 per cent YTD). Managers generated gains from a richening in the secondary market and from a positive carry. After new issuance disappeared in the fourth quarter and in early 2009, the primary market rebounded in March. Managers remain optimistic as credit spreads are wide, volatility arbitrage spreads are wide and event driven opportunities are plentiful.

The Hennessee Merger Arbitrage Index advanced +0.63 per cent in March (+0.96 per cent YTD).  While merger activity has slowed significantly from previous years, there were several new deals that that offered very attractive annualized spreads. The healthcare/biotech space has been especially active in recent months, including Roche buying Genentech, Pfizer purchasing Wyeth, and Merck acquiring Schering-Plough. 

‘Hennessee Group fears that the next banking crisis will be defaults on mortgages for commercial real estate buildings,’ says Gradante. ‘The recession has led to downsizing in companies, resulting in lower rental rates and higher vacancies.  We have seen several credit managers move short positions in residential mortgage-backed securities into commercial mortgage-backed securities.’

The Hennessee Global/Macro Index advanced +0.74 per cent in March (-1.36 per cent YTD). International equities increased in March as investor’s assumed greater risk, with the MSCI EAFE Index advancing +5.87 per cent (-14.64 per cent YTD). 

The Hennessee International Index advanced +0.49 per cent (-2.82 per cent YTD) as managers remained conservative with tight net exposures, low gross exposures and reduced risk. Emerging markets were a bright spot, especially Brazil and China, which have posted gains for the year. 

The Hennessee Macro Index advanced -0.08 per cent for the month (-0.80 per cent YTD).  Macro managers were essentially flat during the month.  Many posted losses on a short long-term Treasuries trade as the Fed announced that it would buy USD300bn in US treasuries, which sparked buying and drove yields down. Gold continued to sell off as investors started to assume more risk and sell gold to buy other assets. Managers generated profits with long exposure to US and global equities after many increased exposure thinking equities were oversold.

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