The Hennessee Hedge Fund Index advanced 3.37 per cent in July and it up 15.50 per cent year-to-date, according to Hennessee Group, a consultant and adviser to direct investors in hedge
The Hennessee Hedge Fund Index advanced 3.37 per cent in July and it up 15.50 per cent year-to-date, according to Hennessee Group, a consultant and adviser to direct investors in hedge funds.
The S&P 500 increased 7.41 per cent in July (9.32 per cent YTD), the Dow Jones Industrial Average increased 8.58 per cent (4.50 per cent YTD), and the Nasdaq Composite Index advanced 7.82 per cent (25.46 per cent YTD).
Bonds also rose, as the Barclays Aggregate Bond Index advanced 1.61 per cent (3.54 per cent YTD).
‘In June, we became concerned about the sustainability of the ‘green shoots’ and felt that momentum in equities was fading. We felt that markets had reached an inflection point where investors would be less concerned about technicals and shift their focus to fundamentals. Earnings came out, and they were better than expected, optimism returned, and markets rallied sharply,’ says Charles Gradante, co-founder of Hennessee Group. ‘The deterioration of the economy has clearly slowed, however we continue to see positive signs that we are on the road to recovery, including increases in new home sales, new orders, and production. That said, I am still cautious and see emerging signs of ‘protectionism’ in the form of dramatic reductions in external lending by G-7 institutions, which could stifle a global economic recovery.’
The Hennessee Long/Short Equity Index gained 2.89 per cent in July (13.39 per cent YTD). After a brief pause in June, equities markets advanced sharply in July, with the Dow Jones Industrial Average having its best one month performance since 2002. The S&P 500 has now rallied 50 per cent from its March low.
Managers were encouraged by positive earnings, including Goldman Sachs beating estimates on record trading, and Intel’s upbeat forecast. In addition, there was positive economic news in the housing market as new home sales climbed 11 per cent last month, representing the biggest gain in eight years. Profits were driven by long portfolios, while hedges and shorts were generally a drag on performance.
Managers generated significant profits in the materials sector, which was the top performing sector in July. Managers still have concerns about job losses, which pose a risk to an economic recovery, and, long term, managers are concerned with the US budget deficits and the sharp increase in money supply.
‘As of 1 July, the Fed has bought USD200bn in treasuries while injecting USD1trn into the banking system,’ says Gradante. ‘The Fed’s exit strategy may be the ‘reverse repo’, where they sell treasuries to banks. This strategy would allow the Fed to tighten monetary policy with less impact on interest rates and could reduce the risk of long term inflation.’
The Hennessee Arbitrage/Event Driven Index gained 3.62 per cent in July (18.49 per cent YTD). As investors’ appetite for risk increased during the last three weeks of July, higher risk assets outperformed higher quality assets. The high yield index advanced 6.2 per cent (37.4 per cent YTD), outperforming high grade corporate credit (up 3.9 per cent in July) and treasuries (up 0.4 per cent in July).
Commercial mortgage-backed securities were one of the best performing asset classes as the government advanced the legacy securities PPIP. High yield credit spreads tightened from 1,055 basis points to 922 basis points during the month, the lowest level since September of 2008, according to Merrill Lynch.
The Hennessee Distressed Index advanced 5.16 per cent in July (23.47 per cent YTD). Managers still expect to see more bankruptcies in 2009; however, there have already been a significant number of defaults, with more than 20 USD1bn plus bankruptcies already this year.
The Hennessee Convertible Arbitrage Index advanced 6.21 per cent (31.64 per cent YTD). Spreads, interest rates and buying in the secondary market made positive contributions, while declining volatility detracted from performance. Redemptions continue to outpace new issuance in the convertible sector. Managers remain very optimistic that conditions for convertible arbitrage will provide opportunity for outsized returns for the next several years.
The Hennessee Merger Arbitrage Index advanced 0.27 per cent in July (5.28 per cent YTD). While M&A activity has declined from 2007 levels, managers state that there are several announced deals trading at attractive spreads. Many managers are increasing exposures and have established positions in the Wyeth-Pfizer, Schering Plough-Merck, and Pepsi Bottling-Pepsi deals. Several deals are yielding 15 per cent on an annualized, unlevered basis.
‘We have expected greater scrutiny and new regulation for the financial industry, and specifically for hedge funds, in 2009,’ adds Gradante. ‘In the energy markets, regulators are calling for hard position limits on financially settled energy contracts set by Nymex, starting as soon as September. While the goal is to reduce speculation and volatility in the energy markets, this could potentially reduce transparency by shifting trading to over-the-counter markets and decrease liquidity. The unpredictability of government intervention continues to be one of the greatest concerns for hedge funds.’
The Hennessee Global/Macro Index advanced 4.12 per cent in July (15.89 per cent YTD). Managers benefited as international equities rallied in July, with the MSCI EAFE Index advancing 9.05 per cent (15.19 per cent YTD).
The Hennessee International Index increased 3.27 per cent (12.70 per cent YTD) as managers partially participated in the market rally. Global markets were strong as positive economic data in the US gave assurances of a global economic recovery. Emerging markets, especially BRIC countries, continued to be strong performers. The Hennessee Macro Index advanced 2.67 per cent in July (8.24 per cent YTD).
The ‘reflation trade’ (long commodities against short treasuries) is still on and provided profits in July as commodities rebounded from their June pull back. Metal positions, specifically aluminum, zinc and other industrial metals, were up sharply. Precious metals, including gold, were also up modestly, a positive for portfolios.
Treasuries were essentially flat in July, as the two-year treasury, ten-year treasury and 30-year treasury were little changed for the month. The US dollar depreciated against the euro and the yen. Managers have concerns about the prospects for the US dollar long term due to the massive increase in money supply. Several managers have expressed concerns with holding any paper currency in the current environment, looking to gold as the preferred currency.
