Hennessee Group LLC, an adviser to hedge fund investors,
announced yesterday that the Hennessee Hedge Fund Index advanced
+0.96% in February (+0.42% YTD), whilethe S&P
500 increased +2.85% (-0.95% YTD), the Dow
Jones Industrial Average advanced +2.56% (-0.99% YTD), and the
NASDAQ Composite Index advanced +4.23% (-1.36% YTD). Bonds rallied,
as the Barclays Aggregate Bond Index increased +0.37% (+1.91% YTD).
“Global equity markets were mixed in February, with the U.S. experiencing
gains and most international markets posting small losses. During the
month, the focus of hedge fund managers was on Greece and its debt level, as
well as potential problems in Spain, Portugal and Italy,” commented Charles
Gradante, Co-Founder of Hennessee Group. “Some managers see this only
as the tip of the iceberg [see also “Is
This the Tip of the Iceberg?” white paper]. Managers fear a downgrade
or threat of downgrade for a G-12 country’s sovereign debt that could
potentially unravel the markets.”
“Hedge funds are outperforming stocks thus far in 2010,” said Lee
Hennessee, Managing Principal of Hennessee Group. “Despite lagging in
February, most hedge funds are positive for the year due to their ability to
limit losses during the sell off in January.”
The Hennessee Long/Short Equity Index advanced +1.48% in February (+0.36%
YTD). January’s sharp sell-off reversed course in mid-February as
investors cheered reports that the European Union was considering helping the
debt-laden Greek government to avoid default and reduce the risk of another
global financial crisis. Hedge fund managers were encouraged but not yet
convinced by the stronger than expected earnings reports and encouraging
economic data that was released in the second half of the month. Managers
took note of the solid equity gains, led by the Russell 2000 Index (small cap
stocks) and the Russell Mid Cap Index, which rose +4.4% and +4.8%, respectively,
indicating a favorable increase in the market’s appetite for risk.
Cyclical stocks led the way confirming managers’ views that the market became
less risk averse, particularly consumer discretionary stocks which gained a
strong +5.3% in February. The intra-month volatility made for a challenging
trading environment for long/short equity funds and led to mixed results.
The Hennessee Long/Short Equity Index slightly lagged the broader equity
markets. Going forward, long/short equity managers will remain cautious
and selective due to the uncertainty surrounding the strength of the economic
recovery and growing concern that sovereign default risks could become a global
problem.
“Long/short equity funds state that they are encouraged by market breadth
witnessed during the recent earnings season,” commented Charles Gradante.
“Managers like the dispersion they are seeing among stocks. Companies
that report good earnings or increase guidance are rewarded, while companies
that fail to meet expectations are being punished. This was not the case
in 2009 when momentum ruled. This is a better environment for long/short stock
picking based upon fundamental research and should bode well for alpha
generation through 2010.”
The Hennessee Arbitrage/Event Driven Index advanced +0.76% in February
(+1.56% YTD). U.S. corporate credit markets registered a positive
month, with leveraged loans and high yield credit posting small gains.
Credit spreads actually widened during the period, though were positive on a
total return basis. Volatility increased in February, as spreads started the
month at 654 basis points, widened to 700 basis points mid-month, but retraced
at the end of the month and finished February at 671 basis points. Capital
markets issuance continued at a high rate, raising $11.8 billion. The
Hennessee Distressed Index increased +0.76% in February (+2.88% YTD).
Distressed managers suffered during the beginning of the month as credit spreads
widened, but were able to recoup losses and post modest gains. Generally,
the distressed markets continue to present ample long and short opportunities
for investors. Managers believe that the significant corporate maturities that
come due in 2012-2014 will prove problematic to refinance and will provide
investment opportunities. The Hennessee Merger Arbitrage Index advanced
+0.52% in February (+0.92% YTD). Managers continue to believe that
M&A activity will pick up due to the lack of economic growth in the United
States and Europe, and the need for companies to manufacture higher
revenues. Managers note that big pharma companies have large cash levels
and are able to make acquisitions without financing dependence. Merger
arbitrage managers continue to invest in large announced deals, including
Affiliated Computer/Xerox, Burlington North/Berkshire, XTO/Exxon Mobile, and
Cadbury/Kraft. The Hennessee Convertible Arbitrage Index returned
+0.14% (+0.45% YTD). Spreads and volatility detracted from
performance, while secondary market richening, positive cash flows and interest
rates made positive contributions in February. The U.S. convertible market
showed continued weakness in February with little issuance and significant
redemptions. The new issues that came to market were generally not well
received.
“Hennessee Group continues to expect higher yields in US Treasuries,
especially on the long end (20 to 30 Year Treasuries). Managers report
that issuance of Treasury securities is increasing in order to fund the deficit
and refinance existing obligations. On the opposite side, the US current account
is declining, reducing foreign demand for Treasuries,” commented Charles
Gradante. “The government is also shortening the overall maturity profile,
which is delaying issues rather than resolving them. Many hedge funds are
short long-term Treasuries as a result.”
The Hennessee Global/Macro Index increased +0.32% in February (-0.60%
YTD). International equities declined with the MSCI EAFE Index
falling –0.88% (-5.28% YTD) during the month.Willingness to assume risk remained
subdued due to fears about the sustainability of global growth, particularly
with the state of the developed world’s balance sheets in Greece, Italy,
Ireland, Portugal, and Spain. In emerging markets, managers are concerned
about a possible return of inflation in China, India, and Brazil. The
Hennessee International Index gained +1.24% (-0.04% YTD) as managers maintained
low net exposures and benefited from US exposure. The Hennessee Macro
Index advanced +1.97% for the month (+1.59% YTD). Ma
