Thu, 10/01/2013 - 10:31
The Hennessee Hedge Fund Index advanced 1.45 per cent in December and is up 6.99 per cent year-to-date.
The S&P 500 increased 0.71 per cent (+13.40 per cent YTD), the Dow Jones Industrial Average gained 0.60 per cent (+7.26 per cent YTD), and the Nasdaq Composite Index advanced 0.31 per cent (+15.92 per cent YTD).
Bonds were down, as the Barclays Aggregate Bond Index declined 0.14 per cent (+4.23 per cent YTD).
“Hedge funds continued to perform well in December, adding to their gains for the year,” says Charles Gradante, managing principal of Hennessee Group. “Hedge fund managers benefited from both increased exposure levels and alpha generation from security selection as high correlations continued to decline among stocks with attractive and unattractive valuations. The fourth quarter was the best quarter of the year for hedge funds as they outperformed the S&P by more than 2.5 per cent on an absolute basis (+1.70 per cent versus -1.01 per cent).”
Equity long/short managers were up in December, as the Hennessee Long/Short Equity Index advanced 0.84 per cent (+5.82 per cent YTD). The looming fiscal cliff put pressure on equity markets, but all markets were able to add to their gains for the year in December. During the month, the best performing sectors were financials (+4.59 per cent), materials (+2.89 per cent) and industrials (+2.26 per cent). There was significant dispersion as several sectors were negative, including consumer staples (-2.54 per cent), telecom (-1.09 per cent) and healthcare (-0.36 per cent).
For the year, equity markets were again volatile, dominated by macro news and geopolitical events that resulted in “risk on” or “risk off” investing. Despite some resolution of the ‘fiscal cliff’ in January, managers continue to be concerned about political uncertainty. The debt-ceiling and spending cuts will have to be addressed in the short term. In addition, the longer term fiscal situation, slowing corporate earnings, and global weakness should become areas of focus. Despite these challenges, managers are cautiously optimistic on stock prices for 2013 due to positive economic growth and continued stimulus. Hedge funds have been increasing net and gross exposures following the US presidential election as there is slightly less uncertainty about the future. In addition, managers state that equities are still fairly valued at 12.6x times projected earnings and look attractive relative to other asset classes, specifically fixed-income yields.
“Investors started the year cautious and had their net exposures down at relatively low levels. They underperformed when the markets rallied 12 per cent in the first quarter, but they performed consistent with their net exposure,” says Lee Hennessee, managing principal of Hennessee Group. “At the time, reduced exposures were warranted due to concerns about Europe. Managers were more focused on protecting capital in a potential sell off and were willing to miss out on upside that was driven by new stimulus efforts and not company fundamentals.”
The Hennessee Arbitrage/Event Driven Index advanced 1.61 per cent (+9.30 per cent YTD) in December, and was the top performing sub-strategy for the year. Credit markets experienced their first negative month since March, as the Barclays Aggregate Bond Index fell 0.14 per cent (+4.23 per cent YTD). Treasuries were negative as yields increased and the yield curve steepened. Confidence about a resolution of the fiscal cliff led to the yield on the 10 Year increasing 16 basis points from +1.62 per cent to +1.78 per cent. The Barclays High Yield Credit Bond Index increased 1.58 per cent (+15.81 per cent YTD). Gains came largely from price increases rather than carry. High yield spreads declined more than Treasuries, as the spread of the Bank of America Merrill Lynch High Yield Master Index over Treasuries tightened 34 basis points from 5.65 per cent to 5.31 per cent.
The Hennessee Distressed Index increased 3.10 per cent in December (+13.61 per cent YTD). Distressed managers experienced gains as equity markets rallied and had contributions from late-stage bankruptcies and post-reorg positions.
The Hennessee Merger Arbitrage Index increased 1.85 per cent in December (+6.26 per cent YTD). Merger funds generated gains amid a robust M&A environment and several special dividend investments. Global deal volume reached USD2.6trn in 2012, roughly in line with volume in 2011. In December, managers benefited from several new deals, including ICE’s USD8.2 billion acquisition of the New York Stock Exchange and Sprint’s USD2.2 billion acquisition of Clearwire.
The Hennessee Convertible Arbitrage Index advanced 0.71 per cent (+10.46 per cent YTD). Convertible arbitrage managers benefited from positive equity markets and tighter credit spreads.
The Hennessee Global/Macro Index increased 2.29 per cent (+6.21 per cent YTD) in December. Global equities posted gains, as the MSCI All-Country World Index ended the month up 2.14 per cent (+13.43 per cent YTD), led by China, Japan, and Russia. International hedge fund managers posted gains, as the Hennessee International Index gained 1.95 per cent (+10.95 per cent YTD).
Emerging markets were also up, as the MSCI Emerging Markets Index added 4.78 per cent (+15.15 per cent YTD). China stocks staged an unexpected December rally, increasing 15 per cent. Hedge fund managers were also positive, but lagged the benchmark due to conservative positioning, as the Hennessee Emerging Market Index was up 3.49 per cent (+5.20 per cent YTD). Macro managers were up in December, as the Hennessee Macro Index increased 1.26 per cent (+0.92 per cent YTD).
December was a good month for macro managers, marking the end of a challenging year as managers struggled to identify investable trends. In December, most managers were positioned for a rally in risk assets on the expectation of positive resolution of the US fiscal cliff. During the month, managers generated gains in fixed income as US yields rose for most maturities in anticipation of the fiscal cliff resolution, while high yield credit continued to tighten. Managers continued to benefit from the sharp rise of the US dollar versus the Japanese Yen following Japanese elections and in anticipation of continued stimulus from the Bank of Japan. The US dollar fell against the Euro on positive news regarding the European banking and sovereign debt crisis. In commodities, gold and most metals declined while oil posted gains.
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