The Hennessee Hedge Fund Index advanced 0.64 per cent in June, bringing year-to-date performance up 11.74 per cent, according to Hennessee Group.
The Hennessee Hedge Fund Index advanced 0.64 per cent in June, bringing year-to-date performance up 11.74 per cent, according to Hennessee Group.
In comparison, the S&P 500 increased 0.02 per cent (1.78 per cent YTD), the Dow Jones Industrial Average decreased 0.63 per cent (-3.75 per cent YTD), and the Nasdaq Composite Index advanced 3.10 per cent (16.36 per cent YTD).
Bonds also rose, as the Barclays Aggregate Bond Index advanced 0.57 per cent (1.90 per cent YTD), led by gains in investment grade and high yield sectors.
‘Most hedge fund managers are not buying into the ‘Green Shoots’,’ says Charles Gradante, co-founder of Hennessee Group. ‘While markets rallied sharply in April and May, most managers remained conservative. I think we have reached an inflection point as momentum seems to have faded. We should see a return to stock picking based on fundamentals, which are rather negative. In addition, the technicals are also bad, leading us to believe in a summer correction.’
The Hennessee Long/Short Equity Index gained 1.10 per cent in June (10.95 per cent YTD). The equity markets lost momentum in June after experiencing strong gains during the first two months of the quarter. Despite a flat June, the second quarter gain was the strongest quarterly gain since 1998.
In June, energy and materials sectors declined as worries mounted that the global economy could experience a drawn out recovery after the World Bank cut the global growth forecast. Managers remain concerned that the recent rally in the financial markets and resurgence in confidence is built on hope supported by government stimulus rather than a real improvement in fundamentals (i.e. employment and housing).
Hennessee Group says long/short equity funds will continue to rely on individual security selection while maintaining low levels of directional exposure as the official second quarter earnings season gets under way with the Alcoa earnings announcement on 8 July. Many managers are overweight technology in long portfolios, the top performing sector for the month and the year, while maintaining short positions in consumer and financial sectors.
The Hennessee Arbitrage/Event Driven Index gained 1.14 per cent in June (13.76 per cent YTD).
Investment grade bonds were up 3.04 per cent and high yield bonds posted a fourth consecutive month of positive performance in June, gaining 3.21 per cent. The high yield index has gained 29.4 per cent in the first half of 2009, a record for a six month period.
The Hennessee Distressed Index advanced 4.45 per cent in June (17.16 per cent YTD). The US high yield default rate increased to 9.5 per cent, up from 2.4 per cent a year ago, and is expected to end the year in a range of 15 per cent to 18 per cent.
The Hennessee Convertible Arbitrage Index advanced 0.21 per cent (21.48 per cent YTD). Spreads and secondary market richening made positive contributions, while interest rates and volatility detracted from performance. Managers remain optimistic on the strategy as credit spreads remain wide and volatility is elevated.
The Hennessee Merger Arbitrage Index advanced 1.21 per cent in June (5.33 per cent YTD). Deal activity has significantly declined relative to a year ago. However, a positive for the strategy is that credit conditions have improved significantly compared to six months ago. Managers have found opportunities in strategic acquisition activity as well as distressed merger and acquisition activity.
‘The Fed is walking a fine line. On one hand, it is draining bank deposits to buy mortgages. However, on the other hand, it is telling banks to lend,’ says Gradante. ‘The net result is that there is less liquidity in the banking system today than a month ago.’
The Hennessee Global/Macro Index declined 0.46 per cent in June (+10.77 per cent YTD). International equities were down slightly in June, with the MSCI EAFE Index declining 0.77 per cent (+5.64 per cent YTD).
The Hennessee International Index declined 0.49 per cent (+6.84 per cent YTD) as managers remain generally conservative, but suffered losses in Russia and other commodity-linked regions. After three months of strong gains, emerging markets cooled, declining slightly in June, but are substantially positive year to date. China was one of the few bright spots in June as the equity markets continued to advance.
