The Hennessee Hedge Fund Index advanced 2.27 per cent in December, bringing its year-to-date performance to 24.85 per cent.
The S&P 500 rose 2.81 per cent in December (24.71 per cent YTD), the Dow Jones Industrial Average increased 0.80 per cent (18.82 per cent YTD), and the Nasdaq Composite Index advanced 5.81 per cent (43.89 per cent YTD).
The Barclays Aggregate Bond Index declined 1.56 per cent (+5.63 per cent YTD).
“With December’s positive performance, the Hennessee Hedge Fund Index has recouped the entirety of 2008’s losses (-19.83 per cent), and the index has established a new high water mark,” says Lee Hennessee, managing principal of Hennessee Group. “Hedge funds kept pace with the S&P 500 this year, exceeding our expectations because managers were risk averse throughout 2009 as the Dow plummeted to 6,448 and sentiment was poor for the entire year. One important consideration is that most funds were underwater in 2009 and thus, did not charge an incentive fee.”
The Hennessee Long/Short Equity Index advanced 2.16 per cent in December (21.44 per cent YTD). Hedge funds added to their gains for the year in December, but underperformed broad equity markets. Some funds reduced exposure and preserved gains as year end approached. Growth continued to outperform value during the month.
The technology sector jumped 5.6 per cent in December, while financials (-1.6 per cent) and energy (-1.0 per cent) were the two primary detractors. Managers are optimistic on long/short equity for 2010 as they feel that equity markets will be more fundamentally driven, allowing managers to identify both long and short opportunities.
The Hennessee Arbitrage/Event Driven Index gained 3.01 per cent in December (30.80 per cent YTD). Distressed and convertible arbitrage managers continued to generate positive performance in December, adding additional gains to an already remarkable year.
The spread on the Merrill Lynch High Yield Index tightened from 765 basis points to 639 basis points during the month, the lowest level since June of 2008. Treasuries and investment grade bonds declined in December, while the High Yield Index posting its tenth consecutive positive month.
The Hennessee Distressed Index advanced 5.06 per cent in December (42.96 per cent YTD). Distressed funds continue to benefit from their directional bias and the contraction in credit spreads. One of the most profitable positions in December for managers was CIT, which emerged from a pre-packaged bankruptcy.
The Hennessee Convertible Arbitrage Index advanced 1.95 per cent (40.53 per cent YTD). In December, spreads, market richening and positive cash carry made positive contributions, while interest rates and volatility detracted from performance. Managers remain optimistic on the opportunity set, however opportunities are not as attractive as six months ago and we are seeing more funds employ leverage to generate gains.
The Hennessee Merger Arbitrage Index advanced 0.83 per cent in December (8.66 per cent YTD). Merger arbitrage continued to underperform more directional strategies, but was able to generate consistent positive performance. Manages expect deal flow to continue as cash strapped companies move to expand by acquiring coveted assets.
“Managers were shell shocked in 2008 as the credit crisis and massive deleveraging caused a major dislocation in several strategies, specifically convertible arbitrage and high yield. In 2009, we witnessed an incredible snapback in these securities, which drove outsized returns,” says Charles Gradante, co-founder of Hennessee Group. “While the last two years have been definitely extreme, we expect 2010 to be more typical, where security selection and credit analysis will drive positive performance.”
The Hennessee Global/Macro Index advanced 1.98 per cent in December (24.58 per cent YTD). Global equities increased, though underperformed U.S. markets, as the MSCI EAFE Index advanced 1.36 per cent (27.75 per cent YTD). Emerging markets again outperformed developed markets, a common theme for 2009. The Hennessee Macro Index declined 0.28 per cent in December (+11.51 per cent YTD).
Managers made significant profits on short treasuries, as the two-year treasury yield jumped from 0.66 per cent to 1.14 per cent, and the ten-year treasury yield rose from 3.20 per cent to 3.84 per cent. The 30-year treasury yield increased from 4.19 per cent to 4.64 per cent. Managers expect the Fed to raise rates in mid-2010 and that should drive long-term rates higher.
Managers retraced some profits long gold, as the S&P GSCI gold spot index declined 7.28 per cent in December; however, most managers are long term holders of gold and did not reduce their holdings. Managers short the dollar also suffered losses, as the dollar index increased significantly over the month against other currencies.
