The Hennessee Hedge Fund Index increased 0.06 per cent in June and is up 2.10 per cent year-to-date, according to the Hennessee Group.
In June the S&P 500 gained 3.96 per cent (8.66 per cent YTD), the Dow Jones Industrial Average advanced 3.93 per cent (5.42 per cent YTD), and the Nasdaq Composite Index increased 3.81 per cent (12.66 per cent).
Bonds were also up, as the Barclays Aggregate Bond Index increased 0.04 per cent (2.37 per cent YTD) and the Barclays High Yield Credit Bond Index increased 2.11 per cent (7.26 per cent).
“It looked like June was going to be another poor month for risk assets until the last trading day of the month. The agreement from European Union leaders towards a future banking union resulted in a short-covering rally,” says Charles Gradante, managing principal of Hennessee Group. “The markets continue to be macro driven. Trading volume is down, volatility is up, correlation is high, and macro events are driving price swings. It remains a challenging environment for security selection. Most managers are not trying to time the market, as it is difficult to do consistently. Most are conservative, trying to generate alpha in specific opportunities.”
Equity long/short managers posted modest positive performance, as the Hennessee Long/Short Equity Index advanced 0.63 per cent (2.58 per cent YTD).
After a relatively calm start to the year, the Dow posted 22 days of triple-digit moves during the second quarter, compared with just six in the first quarter. Equity market volatility continued in June as the S&P 500 ended the month with a gain of nearly 2.5 per cent, bringing the monthly return to four per cent.
Hedge fund managers started June with conservative exposures after the sharp sell-off in May. As a result, hedge funds failed to participate in the market rally.
Looking to July, managers expect volatility to continue as we enter second quarter reporting season, but are optimistic as earnings releases should lead to more dispersion among securities.
Managers are seeing opportunities as equity valuations appear cheap. The S&P 500 is trading at a price-to-earnings multiple of less than 13. Although expectations for earnings have come down, many remain bullish on corporate profits.
However, there are plenty of longer term concerns. While Europe remains a worry for markets, focus seems to have shifted to the US, where investors are concerned about whether a political stalemate will dictate performance during the second half of the year. With government policy affecting financial markets, investors are nervous about the November elections and the year-end “fiscal cliff” of tax cuts and economic stimulus that could drive the US economy into recession.
“Some pundits are saying that a ‘perfect storm’ is developing due to stalled growth in the US, the European debt crisis, a slowdown in China, and military conflict in Iran,” says Gradante. “But many managers are taking a contrarian point of view, stating that this scenario is already built into stock prices. By any measure, stocks are cheap. The S&P 500 is currently trading at a price-to-earnings (PE) ratio of 12.8. Stocks in the UK and France now are trading at only 9.5 times 2012 earnings, the lowest in 30 years. With more than 60 per cent of corporate sales from European firms originating internationally, investing in Europe may be around the corner.”
The Hennessee Arbitrage/Event Driven Index declined 0.28 per cent (+3.11 per cent YTD) in June. The Barclays Aggregate Bond Index increased 0.04 per cent (2.37 per cent YTD).
US yields ended the month slightly higher, as the yield on the 10 Year US Treasury increased eight basis points from 1.59 per cent to 1.67 per cent.
The spread of corporate bonds in the Barclays US Aggregate index over Treasuries tightened slightly, with the average yield on the bonds reaching 3.27 per cent.
High yield credit rallied, as the spread of the BofA Merrill Lynch High Yield Master Index tightened 52 basis points from 6.96 per cent to 6.44 per cent.
The Hennessee Distressed Index fell 1.24 per cent in June (+2.29 per cent YTD). Distressed funds were down for the month as core long positions and special situations declined in value.
The Hennessee Merger Arbitrage Index decreased 0.64 per cent in June (+1.93 per cent YTD). Managers’ performance was mixed as deal spreads widened in several core positions amid heightened volatility. Global mergers and acquisition activity has declined due with renewed concerns about the health of global economies.
The Hennessee Convertible Arbitrage Index advanced 1.02 per cent (5.04 per cent YTD). Convertible arbitrage managers were marginally higher driven primarily from the tightening of credit spreads.
