Hennessee Group, an adviser to hedge fund investors, believes the equity markets are likely to continue their momentum heading into the end of the year and lead to additional gains for investors during the month of December.
Charles Gradante, co-founder of the Hennessee Group, says: “We believe the ‘December effect’, whereby investors choose to defer paying taxes on equity market gains until the following year, will provide additional support to the equity markets as we close out the year. And historical data seems to support this thesis as the equity markets have experienced gains during the final month of the year 70 per cent of the time when positive through the month of November.”
Hennessee Group recently conducted a brief study examining the historical performance of the equity markets and hedge funds when entering the final month of the year with positive year-to-date gains. Dating back to 1995, the S&P 500 Index has generated positive returns through November in ten calendar year periods and experienced additional gains in December 70 per cent of the time. In comparison, hedge funds managed to generate gains in nine of the calendar year periods the S&P 500 Index was positive through November and experienced gains in December 100 per cent of the time.
Gradante says: “The data supports the ‘December effect theory’ and bodes well for investors as we close out 2009. Hennessee Research indicates that when the equity markets were positive through November, they gained on average +2.1 per cent in December while hedge funds gained +1.9 per cent.”
While the Hennessee Group is optimistic for both the equity markets and hedge funds heading into the final month of the year due to the December effect, it is more optimistic that hedge funds are well positioned for a good year on a relative basis in 2010.
The Hennessee Group believes fundamentals will matter again in the coming year which should lead to an increase in dispersion between sectors and individual stocks, particularly as the rally gets long in the tooth.
In addition, the equity markets are likely to trade in a range as opposed to trend in one particular direction in 2010.
The Hennessee Group believes such an environment should favour hedge funds relative to their traditional counterparts as they will have the opportunity to generate alpha on the both the long and short side of their portfolios while not having to rely on market direction or beta for returns.
