Sun, 11/10/2009 - 11:50
The Hennessee Hedge Fund Index advanced 3.18 per cent in September and is up 20.89 per cent year-to-date, according to Hennessee Group.
The S&P 500 increased 3.57 per cent in September (17.03 per cent YTD), while the Dow Jones Industrial Average increased 2.27 per cent (10.66 per cent YTD) and the Nasdaq Composite Index advanced 5.64 per cent (34.59 per cent YTD). The Barclays Aggregate Bond Index advanced 1.05 per cent (5.72 per cent YTD).
“Hedge fund managers we talk to are concerned that the markets are rallying while the real economy is shrinking,” says Charles Gradante, co-founder of Hennessee Group. “Liquidity is driving this market, and that is likely to continue with more than USD3trn on the sidelines. However, liquidity driven markets eventually dry up. Hopefully, credit expansion and GDP growth arrive to support the market in 2010.”
The Hennessee Long/Short Equity Index gained 3.13 per cent in September (18.75 per cent YTD). Despite rich equity market multiples and uncertainty surrounding the upcoming third quarter earnings reports, investors continued to pile into stocks due to a favorable economic report that came out of the most recent FOMC meeting and an uptick in merger activity during the month.
The S&P 500 index finished September up 3.6 per cent, faring much better than the average loss of 1.2 per cent the S&P has historically posted during the month of September dating back to 1929. While gains were broad based, the index was led higher by industrials (+6.6 per cent) and consumer discretionary (+5.2 per cent) stocks. The S&P is now up over 55 per cent since hitting a 12-year low in March.
As the equity markets continue to show strength and momentum, hedge funds have taken on additional directional risk in order to participate in the ongoing equity market rally. That said, they remain cautious and aware the market could turn sharply to the downside given current valuations and the apparent disconnect between technical indicators and fundamentals.
“Little of the bail out money given to banks seems to have been passed on to businesses or consumers. It must have gone somewhere, and it is possible that is has gone to the proprietary desks of the banks, which are putting it to work in the markets,” says Gradante. “That could lead to a potential problem if the public and institutions do not join the rally, and the banks eventually have to sell equities into a vacuum.”
The Hennessee Arbitrage/Event Driven Index gained 3.04 per cent in September (23.35 per cent YTD). Positive contributions came from credit, convertible arbitrage, distressed, merger arbitrage and other strategies.
Credit spreads continued to tighten, reaching back to August 2008 levels, as flows into bond funds, out of non-yielding money market funds, continued. The spread on the Merrill Lynch High Yield Index tightened from 912 basis points to 793 basis points during the month. Managers express caution as even low quality debt has rallied strongly despite weak fundamentals.
The Hennessee Distressed Index advanced 3.92 per cent in September (28.30 per cent YTD). Managers benefitted from tightening spreads as well as several event specific catalysts. With some of the largest US institutions in distress, managers are having no problems finding new opportunities and are very optimistic on the strategy over the next three to five years.
The Hennessee Convertible Arbitrage Index advanced 3.43 per cent (39.29 per cent YTD). Spreads and secondary market richening were positive contributors to the strategy. Volatility declined during the month, which detracted from performance. Managers report that there has been significant profits generated from corporations recalling and restructuring convertible issues in order to improve balance sheets.
The Hennessee Merger Arbitrage Index advanced 0.48 per cent in September (6.65 per cent YTD). Mergers and acquisition activity continued with Xerox’s planned purchase of Affiliated Computer Services and Walt Disney’s acquisition of Marvel Entertainment. Managers expect M&A activity to continue, but remain underinvested in merger arbitrage as they feel that there are more attractive opportunity sets currently elsewhere.
The Hennessee Global/Macro Index advanced 3.48 per cent in September (22.05 per cent YTD). Global equities rallied as the MSCI EAFE Index advanced 3.59 per cent (25.49 per cent YTD), with strong performance across most emerging and developed markets, with the exception of Japan.
The Hennessee Macro Index advanced 3.35 per cent in September (12.76 per cent YTD). Macro managers posted their best month since May as they profited from long positions in precious metals, short the dollar, and long emerging markets. Managers profited long sugar, which is up 80 per cent year to date, as weather conditions in India and South America have diminished supply.
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