The Hennessee Hedge Fund Index gained 24.6 per cent in 2009, according to data from Hennessee Group.
The S&P 500 advanced 24.7 per cent, the Dow Jones Industrial Average returned 18.8 per cent, and the Nasdaq Composite Index jumped 43.9 per cent.
Bonds also experienced broad based gains as the Barclays Aggregate Bond Index rose 5.9 per cent, while the Merrill Lynch High Yield Master II Index gained an impressive 57.5 per cent.
“Hedge funds experienced their best year since 1999 and were able to perform in line with the traditional equity markets in 2009 despite the strong rally and moderate net exposure,” says Charles Gradante, managing principal of Hennessee Group. “The top three performing strategies in 2009 included convertible arbitrage, emerging markets and distressed. Of these, we are particularly bullish in distressed in 2010 due to enormous opportunities still remaining and yet to come.”
The Hennessee Arbitrage/Event Driven Index advanced 30.1 per cent in 2009, driven by gains in the top two performing hedge fund strategies for the year – convertible arbitrage and distressed. Managers were able to take advantage of the massive deleveraging and forced liquidations as a result of the credit crisis in 2008 and purchase securities at very attractive valuations earlier in the year.
The Hennessee Convertible Arbitrage Index, advanced 39.9 per cent, its best year on record. Convertible bond funds benefited from elevated levels of volatility and a significant contraction in credit spreads throughout the year. In addition, the convertible market received a significant boost from cross-over buyers that were attracted to the deeply discounted valuations.
Credit spreads dropped from a historic wide of 2,000 bps above treasuries to 639 bps. Distressed funds benefited from the steep contraction in credit spreads and a long bias, as the Hennessee Distressed Index rose 43.3 per cent for the year. Distressed managers were also able to take advantage of a growing opportunity set throughout the year, as the default rate on junk bonds reached 12.0 per cent in late 2009, up from only 2.8 per cent a year ago.
The Hennessee Merger Arbitrage Index advanced 9.1 per cent for the year. Merger arbitrage was a lagging strategy in 2009 as financing was less attainable and deal flow slowed considerably throughout the year, particularly in value.
“With the S&P 500 Index trading at a multiple of approximately 23x, the equity markets appear to be pricing in strong earnings growth and a V-shaped economic recovery in 2010,” says Gradante. “We believe momentum may have carried the equity markets too far in 2009 and at current levels, appear a bit frothy. If earnings or economic growth disappoint, we could see a near term correction. In addition, we anticipate fundamentals to be under greater scrutiny in 2010 which should lead to large performance dispersions among stocks and sectors. This should prove to be a favorable environment for long/short equity funds.”
The Hennessee Long/Short Equity Index advanced 21.7 per cent in 2009. After plunging nearly 60 per cent from its high in October 2007 through early March 2009, the equity markets experienced a strong, broad based rally, gaining over 65 per cent during the final nine months of the year. Long/short equity funds profited from positions in their long portfolios while short portfolios and hedges generally served as a drag on performance.
Growth stocks outperformed value with the Russell 3000 Growth Index gaining 37.0 per cent in 2009 while the Russell 3000 Value Index advanced 19.8 per cent.
From a sector perspective, technology stocks led the way with a 59.9 per cent gain, followed by material stocks (45.2 per cent) and consumer discretionary stocks (38.8 per cent).
Hedge funds most willing to take on heightened directional risk while buying up high beta stocks that experienced the steepest sell-offs during the credit crisis were most rewarded while those funds that remained defensively positioned, and cautious, with an emphasis on fundamentals, generally lagged, particularly as the year progressed. Short biased managers suffered in 2009 as the Hennessee Short Biased Index declined 17.5 per cent.
The Hennessee Global/Macro Index advanced 24.6 per cent in 2009. The international equity markets participated in the broad based market rally, led by the emerging markets, particularly China. The Hennessee International Index advanced 21.4 per cent for the year, while the Hennessee Emerging Markets Index returned 39.1 per cent.
The MSCI EAFE rose 27.8 per cent, while the MSCI Emerging Markets Index jumped 74.5 per cent and the Shanghai SE Composite Index leaped 79.9 per cent. The Chinese equity markets benefited from a favourable economic outlook due to unprecedented government support and a general belief the country will lead the global economy out of recession.
Another area of strength in 2009 was Latin America as the MSCI EM Latin American Index gained a strong 98.1 per cent for the year, led higher by Brazil. While macro funds lagged the majority of strategies in 2009, the Hennessee Macro Index still managed to produce a respectable gain of 13.1 per cent for the year. Popular themes for macro managers in 2009 included short positions in the US dollar and treasuries, and long positions in oil and gold. In addition, macro managers took advantage of historically low rates, particularly in the US, to profit from the carry trade.
The S&P Crude Oil Spot gained 77.9 per cent for the year after selling off steeply in late 2008 while gold reached an all-time high crossing over USD1,200 in November of 2009.
