The Hennessee Hedge Fund Index advanced 1.72% in February (+4.07% YTD), while the S&P 500 advanced 4.06% (+8.60% YTD), the Dow Jones Industrial Average increased 2.53% (+6.02% YTD), and the NASDAQ Composite Index climbed 5.44% (+13.89%).
Bonds also advanced, as the Barclays Aggregate Bond Index declined 0.02% (+0.86% YTD) and the Barclays High Yield Credit Bond Index advanced 2.37% (+5.48%).
“Hedge funds are off to the best start since 2000,” says Charles Gradante, Co-Founder of Hennessee Group. “During the first two months of the year, hedge funds have benefitted from a better investment environment relative to 2011, with improved investor sentiment, greater risk taking, lower correlations and lower volatility. Markets are responding to fundamentals, which is benefiting stock pickers. While many risks remain, there is optimism around a better economic outlook for the US and stability in the Euro zone.”
“Hedge funds performed well in February generating gains despite conservative exposures. As the investment environment has improved over the last two months, we have seen managers increase exposure levels,” said Lee Hennessee (pictured), Managing Principal of Hennessee Group. “Hedge fund exposures are approaching historical norms, though managers remain somewhat cautious. Hedge funds are prepared to quickly adjust exposure should conditions dictate, as many feel volatility may rise from currently subdued levels.”
Equity long/short posted gains in February, as the Hennessee Long/Short Equity Index advanced 1.45% (+3.67% YTD). Financial market gains continued as investor sentiment around with the European debt crisis and US economic recovery continued to improve. During the month, the Dow Jones Industrial Average and the S&P 500 reached levels not seen since 2008. Market performance was driven by reports of strong corporate earnings, encouraging economic data and accommodative measures of central banks globally. US PMIs and employment data supported the domestic recovery that is continuing to build steam. Market volatility continues to decline sharply, with the VIX down 20% in the first two months of 2012. Gains were broad based and across sectors. Financials, technology and consumer discretionary were the best performing sectors. Stock-specific correlation has come down, benefiting stock-selection and allowing managers to generate alpha.
“There are some similarities between the beginning of 2012 and early 2011, and several managers have expressed some concern about a potential correction,”commented Charles Gradante. “The S&P 500 has rallied 20% since October 2011. Investor sentiment may be peaking. Some managers feel that the markets are overbought and are due for a short-term correction.”
The Hennessee Arbitrage/Event Driven Index advanced 1.53% (+4.04% YTD) in February. Along with an equity market rally, credit markets advanced for the month. Corporate credit markets experienced a tightening of spreads, significant investor inflows and a robust primary market. The Barclays High Yield Credit Bond Index advanced 2.37% in February and the S&P/LSTA Leveraged Loan Index rose +0.8% during the month. The Hennessee Distressed Index increased 1.86% in February (+4.93% YTD). Distressed strategies posted solid gains as the markets rallied, liquidity increased, and investor risk tolerance continued to improve. The Hennessee Merger Arbitrage Index advanced 1.72% in February (+2.89% YTD). During the month, corporate M&A spreads continued to tighten, benefiting portfolios. Managers are becoming bullish about the potential for increased corporate activity given pressure on companies to deploy high cash balances, low levels of volatility and attractive valuations. The Hennessee Convertible Arbitrage Index returned 1.78% (+3.79% YTD). Convertibles rallied in February driven mostly by higher equities and tighter credit spreads. Managers also reported that it appeared as though there was a pickup in outright buying as credit and equity markets rallied.
“Managers lost money in their long gold trade as the Fed denied any near term QE3, sending gold down -5% in a single day and ending down for the month,” says Charles Gradante. “Despite the pullback, managers remain bullish on the gold thesis. They feel that we are likely to see inflation, which will lead to appreciation in the precious metal.”
The Hennessee Global/Macro Index advanced 2.65% (+5.03% YTD) in February, driven by strong gains in both global and macro strategies. During the month, the market continued to focus on the impact of the ECB’s long-term repo operations (LTRO) in reducing systemic risk in the Euro-area. International equities advanced, as the MSCI EAFE Index increased 5.44% (+10.98% YTD). International hedge fund managers were also positive, as the Hennessee International Index advanced 2.85% (+5.16% YTD) in February. Emerging market hedge funds added to their gains in February, as the Hennessee Emerging Market Index increased +2.69% (+5.07% YTD). Managers remain concerned about the debt issues in Europe and a slowing China, but have greater optimism on investment opportunities. During the month, markets became more focused on geopolitical risks in the Middle East, which led to a sharp increase in the price of crude oil. Macro managers posted solid gains in February, as the Hennessee Macro Index increased 2.02% (+2.51% YTD) for the month. Managers made profits in equities, fixed income, currency and commodity exposure. US yields rose across nearly all maturities, while credit tightened for the month. Global equities and credit markets posted strong gains. A late month sell-off in gold impacted commodity gains, but oil and other metals registered positive performance for the month. The US dollar declined against most major currencies as volatility fell and risk tolerance improved.