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Hedge funds decline 0.50 per cent in January

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The Hennessee Hedge Fund Index declined 0.50 per cent in January, while the S&P 500 declined 3.70 per cent, the Dow Jones Industrial Average declined 3.46 per cent and the Nasdaq Composite Index declined 5.37 per cent. 

Bonds rallied, as the Barclays Aggregate Bond Index increased 1.53 per cent.

“January was a challenging month as the equity rally was short lived and reversed course mid-month. Managers were defensively positioned with low net exposures and were able to limit losses,” says Charles Gradante, co-founder of Hennessee Group. “While 2009 was all about market beta, 2010 is going to be a year driven by alpha. Security selection will drive outperformance. We are already seeing greater dispersion and lower correlations, which should benefit hedge funds.”

The Hennessee Long/Short Equity Index declined 0.86 per cent in January as major equity indices finished the month in the red; both the S&P 500 Index and Russell 2000 Index finished January down 3.7 per cent, while the Dow Jones Industrial Average lost 3.5 per cent. 

Despite respectable earnings, particularly from financial firms, and positive economic data, stocks retraced in January as China moved to tighten lending, and investors grew concerned about global growth. 

Also contributing to the downturn in stocks was uncertainty surrounding the Obama administration’s renewed push for more strenuous regulation against banks.  

From a sector perspective, healthcare was the sole sector to experience gains in January with a 0.4 per cent return. Healthcare stocks, which hedge funds are overweight, were buoyed by strong gains in biotech as well as by the special Senate election in Massachusetts which was won by Republican Scott Brown and is likely to complicate President Barack Obama’s proposed overhaul of the US healthcare system.

Telecomm (-9.3 per cent), technology (-8.5 per cent) and materials (-8.7 per cent) stocks experienced the sharpest declines during the month of January, while the KBW Bank Index jumped 9.0 per cent on better than expected earnings from some of the major financial institutions. 

The Hennessee Arbitrage/Event Driven Index advanced 0.64 per cent in January. Multiple arbitrage managers are optimistic on 2010 and stress that security selection will drive outperformance. Most are positioned conservatively with modest leverage, low net exposures, and high diversification.

Spread on the Merrill Lynch High Yield Index widened slightly from 639 basis points to 654 basis points during the month. The Hennessee Distressed Index increased 1.06 per cent in January as a positive yield offset a slight widening of spreads. Managers state that while it appears that the default rate will moderate in coming months, there is a significant overhang of challenged companies and distressed opportunities. Managers report that muted GDP growth, high leverage, and significant maturities should benefit distressed investing for several years.

The Hennessee Merger Arbitrage Index advanced 0.40 per cent in January. Managers benefited from Kraft and Cadbury reaching an agreement and closure in Disney-Marvel and Oracle-Sun Microsystems deals. Managers state that annualized deal spreads are eight to ten per cent, which are relatively attractive. After two years of declining volume, managers expect an acceleration of M&A activity as companies with high cash levels will attempt to grow revenue through acquisitions and increase their global presence. 

The Hennessee Convertible Arbitrage Index returned 0.23 per cent. Positive contributions from interest rates, volatility and a positive carry were offset by cheapening in the secondary market. Opportunistic buying in the first week of the year faded quickly as many were selling into the strength. Managers indicate that leverage and financing has improved, allowing funds to enhance returns.

“At the heart of a long-term global recovery is China allowing it’s currency to float. No other country is more responsible for global unemployment than China. They are the world’s largest exporter,” says Gradante. “Besides concerns about a protracted recession, hedge fund managers have a new concern, inflation in emerging markets, especially India and China. Inflation in the emerging markets could be exported to developed nations.”

The Hennessee Global/Macro Index declined 0.97 per cent in January. International equities declined sharply in January as investor’s risk aversion increased, with the MSCI EAFE Index declining 4.44 per cent, in line with US markets.  

The Hennessee International Index fell 1.01 per cent as managers maintained low net exposures. Managers remain concerned about issues in Europe as Portugal, Italy, Greece and Spain threaten to undermine the Eurozone. Russia was a bright spot for international equities, strengthening in January, while most other emerging markets saw declines. 

The Hennessee Macro Index declined 0.39 per cent for the month. Many macro managers took losses long equities as they expected a continued market rally due to improving growth forecasts and accommodative monetary policy. Some managers were able to profit from the continued dollar rally, as excessive dollar pessimism continued to unwind. The strengthening in the dollar has also forced many to unwind the dollar carry trade. Managers suffered losses in gold, as prices fell to a three-month low of USD1,044, and oil, as crude prices sharply retreated on economic growth concerns. 

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