The Hennessee Hedge Fund Index advanced 1.70 per cent in November, taking its year-to-date performance to 22.40 per cent.
The S&P 500 rose 5.34 per cent (20.84 per cent YTD), the Dow Jones Industrial Average increased 6.51 per cent (17.87 per cent YTD), and the Nasdaq Composite Index advanced 4.86 per cent (35.99 per cent YTD). The Barclays Aggregate Bond Index advanced 1.29 per cent (7.61 per cent YTD).
“Hedge funds underperformed the broad markets in November as momentum continued to push security prices higher,” says Charles Gradante, co-founder of Hennessee Group. “We believe the market is close to entering the next phase, where stock prices will be driven by earnings, rather than multiple expansion. This should serve as a better environment for hedge funds and lead to outperformance in 2010.”
The Hennessee Long/Short Equity Index advanced 1.76 per cent in November (18.98 per cent YTD). The equity markets rebounded in November due to encouraging economic data and better than expected earnings reports. Large cap stocks outperformed with the S&P 500 Index gaining 5.3 per cent and reaching new highs for 2009.
All ten sectors experienced gains during the month led by materials (11.3 per cent), industrials (8.7 per cent) and healthcare (9.0 per cent).
Long/short equity funds generated gains in November, however lagged their traditional counterparts due to their defensive posturing and reduced exposures. Long/short equity managers remain cautious as they measure the strength and depth of the economic recovery and question current market multiples. In addition, some managers appear content maintaining reduced risk exposures through the end of the year.
“While market multiples appear elevated in light of the strong equity rally, Hennessee Group research indicates we could see the momentum carry the markets higher through the end of the year,” says Gradante. “The ‘December effect’, whereby investors choose to defer paying taxes on equity market gains until the following year has historically provided support to stocks during the final month of the year and we anticipate this year to be no different.”
The Hennessee Arbitrage/Event Driven Index gained 1.85 per cent in November (28.25 per cent YTD).
The spread on the Merrill Lynch High Yield Index widened slightly from 760 basis points to 765 basis points in November, hitting a low of 751 basis points mid-month. Bonds were again positive, however high yield bonds underperformed high grade and treasuries for the first time in a year. High yield and high grade primary markets remain open with significant investor interest.
The Hennessee Distressed Index advanced 3.13 per cent in November (36.78 per cent YTD). Distressed funds continue to benefit from their directional bias. Many managers are now focusing on post-reorganisation equities as several companies emerge from bankruptcy, including Delphi and CIT. Managers are also starting to look at the 2005 to 2007 leverage buyout vintages and expect these deals to be the next large set of defaults.
The Hennessee Convertible Arbitrage Index advanced 0.75 per cent (40.57 per cent YTD). Despite a slight widening of spreads and decline in volatility, managers were able to generate gains due to strong secondary market performance and lower interest rates. New issuance remains disappointing, while redemptions remained high.
The Hennessee Merger Arbitrage Index advanced 0.74 per cent in November (7.84 per cent YTD). Many managers saw allocations to merger arbitrage decline significantly after closure of the big pharmaceutical deals. However, many feel that M&A activity is going to continue and anticipate increasing allocations as new deals emerge. Many are encouraged by the pick up in bidding situations, such as Hershey and Kraft bidding for Cadbury.
“Hennessee Research is evaluating the potential for asset bubbles in emerging markets. Much of the future global growth depends on emerging market GDP growth,” says Gradante. “We just saw issues in Dubai and there may be other issues. I have some concerns that we may be seeing a bubble in China. With the US unable to get concessions from China regarding its currency relationship with the dollar, it looks as though the dollar is being used as a trade weapon, causing a huge asset bubble to develop specifically in China, as it happened before in Japan.”
The Hennessee Global/Macro Index advanced 1.46 per cent in November (22.34 per cent YTD). Global equities increased, though underperformed US markets, as the MSCI EAFE Index advanced 1.75 per cent (26.03 per cent YTD).
The Hennessee International Index advanced 2.67 per cent (20.78 per cent YTD). Emerging markets were strong, led by Latin America. Managers lost money in India due to Dubai World’s announcement of restructuring and request of a standstill agreement from providers of financing.
The Hennessee Macro Index advanced 1.00 per cent in November (9.73 per cent YTD). One of the most common macro themes, long gold, was profitable in November as the S&P GSCI gold spot index increased 13.64 per cent during the month, its largest monthly advance in 2009.
The dollar short continues to be a profitable trade as the US dollar index continued to decline in November. One of the key detractors for the month was the short treasury trade. Treasures rallied as the two-year treasury yield dropped from 0.85 per cent to 0.65 per cent, and the ten-year treasury yield fell from 3.39 per cent to 3.20 per cent. At the same time, the 30-year treasury yield eased from 4.23 per cent to 4.19 per cent.
