Hennessee Group LLC, an adviser to hedge fund investors, announced that the Hennessee Hedge Fund Index declined -1.58 per cent in November (+11.94 per cent YTD), while the S&P 500 decl
Hennessee Group LLC, an adviser to hedge fund investors, announced that the Hennessee Hedge Fund Index declined -1.58 per cent in November (+11.94 per cent YTD), while the S&P 500 declined -4.40 per cent (+4.45 per cent YTD), the Dow Jones Industrial Average fell -4.01 per cent (+7.28 per cent YTD), and the NASDAQ Composite Index declined -6.93 per cent (+10.17 per cent YTD). The Lehman Aggregate Bond Index advanced +1.80 per cent (+6.66 per cent YTD).
‘November was a good example of the value that hedge funds provide to investors, as losses by hedge funds are generally less than those of the overall market in periods of turbulence,’ says E. Lee Hennessee, Managing Principal of Hennessee Group. ‘The increase in equity volatility has provided good opportunities for long/short equity strategies this year, although arbitrage strategies have not fared as well.’
The Hennessee Long/Short Equity Index declined -1.56 per cent in November (+12.57 per cent YTD). November marked the worst monthly performance for most of the equity indices since December 2002. US equities posted steep declines during the month, with losses limited by a late month rally. Financial companies continued to lag, with the S&P Financial Index falling -8.1 per cent in November (-16.0 per cent YTD) as losses continued to mount due to exposure to mortgage-backed securities and CDOs. The majority of the gains for long/short equity funds were made on the short side in November, as the environment for short selling continued to improve.
‘Equities are pricing in a reasonable likelihood of a US recession in 2008, as the financial and consumer sectors have been the weakest performers for the year,’ says Charles Gradante, Managing Principal of Hennessee Group. ‘With valuations seemingly fairly valued at 15 times 2008 operating earnings, most believe that equity prices will follow earnings growth next year. The consensus is currently expecting double digit earnings growth in 2008, although this seems rather inflated due to large write downs by banks this year.’
The Hennessee Arbitrage/Event Driven Index declined -1.61 per cent in November (+7.56 per cent YTD), as most arbitrage strategies posted losses and many funds reduced risk by further de-levering portfolios. The Hennessee Distressed Index declined -1.21 per cent in November (+9.37 per cent YTD). Credit strategies experienced a difficult month as high yield credit spreads widened from 4.3 per cent to 5.4 per cent over the 10 Year Treasury. Moody’s predicts that the default rate on high yield bonds will increase to greater than 4 per cent in 2008, up from 1 per cent today.
Merger arbitrage also experienced some difficulty, as the Hennessee Merger Arbitrage Index declined -1.69 per cent (+13.26 per cent). While worldwide merger and acquisition activity has set an all time-time record for the year, eclipsing USD 4.2 trillion through the end of November, activity has slowed substantially in recent months. Negative performance in November was primarily driven by the overall decline in equities and the fact that several LBO deals finally broke.
Convertible arbitrage also experienced a difficult month, as the Hennessee Convertible Arbitrage Index declined -2.04 per cent (+3.01 per cent YTD). While volatility increased, credit spreads widened substantially. Quantitative strategies such as statistical arbitrage also posted losses, continuing the declines experienced over the summer.
The Hennessee Global/Macro Index declined -1.68 per cent in November (+15.84 per cent YTD). Whereas the decline in equities earlier in the year was mostly limited to the US, equities fell globally in November, led by China, as investors began to doubt the lack of correlation between the US and China. Concerns about the US economy caused a large rally in US Treasuries and declines in the US dollar and most commodities. The dollar again reached a record low against the euro, while the strength of the yen and the associated unwinding of the yen carry trade may have been a further cause for the decline in many asset classes.
‘Pressure continues to build on China to revalue its currency,’ says Gradante. ‘We believe that it is now in their best interests to do so, as inflation was recently reported at 6.5 per cent in China. Furthermore, the US economy is clearly slowing and an appreciation in the yuan would make the US more competitive.’
