Wed, 10/10/2012 - 12:15
The Hennessee Hedge Fund Index increased 1.26 per cent in September and is up 5.03 per cent year-to-date.
The S&P 500 gained 2.42 per cent (+14.56 per cent YTD), the Dow Jones Industrial Average advanced 2.65 per cent (+9.99 per cent YTD), and the Nasdaq Composite Index increased 1.61 per cent (+19.62 per cent YTD).
Bonds were also up, as the Barclays Aggregate Bond Index increased 0.14 per cent (+4.00 per cent YTD).
“Despite generally disappointing economic data in the US, the Fed’s announcement of additional monetary stimulus encouraged investors to increase risk tolerance and led to a market rally,” says Charles Gradante, managing principal of Hennessee Group. “Over the long term, managers are concerned that the global economy seems incapable of growing without constant liquidity from central banks. Current monetary policy is extreme and untested, and it is likely to have negative long-term ramifications. However, until then, ‘don’t fight the Fed’ is still the rule.”
The Hennessee Global/Macro Index advanced 1.10 per cent (+3.32 per cent YTD) in September. Global equity markets posted gains for the fourth consecutive month in September, with all regions contributing positive performance. The MSCI All-Country World Index ended the month up 2.93 per cent (+10.71 per cent YTD). International hedge fund managers posted gains, as the Hennessee International Index advanced 1.12 per cent (+5.61 per cent YTD). The ECB's declaration of support and bond-buying programme has lessened the risk for the Eurozone in the short term.
However, managers are cautious as the debt crisis in Europe remains unresolved and the economy is stagnating. Emerging markets were positive, outperforming developed markets for the first time since February, as the MSCI Emerging Markets Index gained 5.84 per cent (+9.41 per cent YTD). Hedge fund managers benefited, as the Hennessee Emerging Market Index advanced +.57 per cent (+2.59 per cent YTD). Managers remain bullish on emerging markets as inflation appears contained and many countries are in the process of easing monetary policy.
Macro managers posted losses in September, as the Hennessee Macro Index declined -1.63 per cent (+1.69 per cent YTD). Performance was mixed as sharp reversals in key themes led to losses for many managers. Managers experienced losses in fixed income as markets traded lower. Treasury positions were lower across the board as yields increased. Managers generated gains long equities as equity markets were up across the globe.
Commodities were positive as the Dow Jones-UBS Commodity Index was up 1.70 per cent (+5.56 per cent YTD) for the month of September amid expectations that global central bank measures to stimulate economic growth may improve manufacturing. Gold was a major beneficiary of the quantitative easing programs announced during September, increasing 7.73 per cent (+16.00 per cent YTD). The commodity rally started to stall at the end of the month, raising concerns about whether gains will continue.
The US dollar was generally weaker due to the additional stimulus, as the US Dollar Index declined 1.43 per cent (-1.65 per cent YTD). The Euro strengthened 2.59 per cent (-0.73 per cent YTD) again the US dollar, breaking key technical levels and squeezing short positions.
“Hedge funds performed well in September. They were able to capture a portion of the upside due to increased net exposures. Shorting and hedging continues to be a drag on performance,” says Lee Hennessee, managing principal of Hennessee Group. “We are encouraged by an improvement in hedge fund performance over the last couple months. Correlations have declined, and managers are being rewarded for good stock selection.”
Equity long/short managers were up in September, as the Hennessee Long/Short Equity Index advanced 1.51 per cent (+5.13 per cent YTD). The rally in the US equity markets continued in September and was fuelled by the Federal Reserve decision to implement QE3. The S&P 500 was up 2.42 per cent for the month, despite experiencing a 1.3 per cent decline in the last week of the month on softer economic data and renewed European sovereign debt concerns. Managers began increasing exposures in July as they gained comfort that Europe would avoid implosion in the short term and have benefited from a market rally in August and September. While managers have generated significant gains on the long slide of the portfolio, they continue to have difficulty shorting. Managers report that “the tide has been raising all ships in this low volume, ‘climb-the wall-of-worry’ rally, despite the deepening uncertainty of the global economy and the slowing pace of earnings growth.”
Managers report that many companies with deteriorating fundamentals have rallied more than the market over the past several quarters, resulting in short squeezes. However, managers are reluctant to reduce short exposure due to many risks that are present. Most managers feel that the markets will continue to rally due to stimulus, but are concerned that fundamentals are not improving. In the US, earnings forecasts continue to be revised lower. In addition, there is major political uncertainty with the Presidential election in November. The year-end ‘fiscal cliff’ is also a major risk and unless it is dealt with effectively, it could push the country back into recession in 2013. Managers are struggling to participate with the upside of this Fed driven rally, while being conservatively positioned until there is clarity on global growth and key fiscal issues in the US and Europe. Better economic news and less political uncertainty in the US would likely lead managers to significantly increase net exposures.
The Hennessee Arbitrage/Event Driven Index advanced 0.80 per cent (+6.06 per cent YTD) in September. Bonds were up, as the Barclays Aggregate Bond Index increased 0.14 per cent (+4.00 per cent YTD). US Treasury yields rose for the month but settled off mid-month highs as the long end of the curve steepened. The yield on 10 year Treasury increased seven basis points from 1.57 per cent to 1.64 per cent. The Barclays High Yield Credit Bond Index increased 1.39 per cent (+12.12 per cent YTD). The spread of the Bank of America Merrill Lynch High Yield Master Index over Treasuries tightened 24 basis points from 5.98 per cent to 5.74 per cent, just below its long term average of 5.80 per cent. The effective yield reached an all-time low of 6.30 per cent in mid-September. Low interest rates resulting from the Federal Reserve's monetary policy are pushing investors into riskier assets, creating significant demand for investment-grade and high-yield corporate bonds and driving down yields.
Over the last several years, the rising tide has lifted all ships, but managers believe that it is likely to end. There is significant dislocation between overvalued and undervalued securities, and managers hope to take advantage through superior security selection. The Hennessee Distressed Index increased 1.51 per cent in September (+6.76 per cent YTD). Distressed Index posted a gains as high yield credit markets improved and equity markets rallied. The Hennessee Merger Arbitrage Index increased 0.11 per cent in September (+3.23 per cent YTD). Merger funds posted small gains. Deal activity remains slow due to economic turmoil in Europe, weak US economic data, and slower growth in emerging economies such as China and Brazil. The Hennessee Convertible Arbitrage Index advanced 0.88 per cent (+7.85 per cent YTD). Convertible arbitrage managers were positive due to gains in credit which were partially offset by rising yields and falling volatility.
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