February 9, 2009 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +1.10% in January (+1.10% YTD), while the S&P 500 declined -8.57% (-8.57% YTD), the Dow Jones Industrial Average declined
-8.84% (-8.84% YTD), and the NASDAQ Composite Index declined -6.38% (-6.38% YTD). Bonds also declined, as the Barclays Aggregate Bond Index declined -0.88% (-0.88% YTD).
“Hedge funds had a great start to the year, led by arbitrage strategies,” commented Charles Gradante, Co-Founder of Hennessee Group. “While equity markets were down between -6% and -10%, hedge funds were up +1%. On a relative basis, hedge funds outperformed by more than +10%, protecting a significant amount of capital.”
“We are encouraged by the $6.5 billion that poured into mutual funds during the last week of January,” said Lee Hennessee, Managing Principal of Hennessee Group. “We continue to monitor fund flows and believe that if this trend continues, it could be basing and a bullish sign for equity markets.”
The Hennessee Long/Short Equity Index advanced +0.90% in January (+0.90% YTD). The broad equity markets declined sharply in January, experiencing the worst start to a new year in history, due to the concerns over the contracting economy and weaker than expected earnings reports. Hedge funds have maintained low gross and net exposures, as well being overweight defensive sectors, such as healthcare, which was the best performing sector in January. Managers were also able to generate significant gains on their short books. Managers profited from identifying shorts on expectations of missing earnings, as only 55% of companies had met earnings expectations in January, the lowest percentage since 2001. Many focused short exposures on financials and consumer discretionary names, particularly retail.
“Hennessee Group has heightened concerns about the largest upsurge in unemployment in China’s history. Hennessee Group research shows that China is moving from an export to import driven economy, dependent on internal consumption,” said Charles Gradante. “We expect China to sell dollars against the Yuan to strengthen their currency in order to increase jobs and increase purchasing power of American goods. China recognizes it needs to become more of a consuming economy of American goods.”
The Hennessee Arbitrage/Event Driven Index advanced +2.36% in January (+2.36% YTD) and helped drive positive returns for the industry. The Hennessee Distressed Index increased +1.30% in January (+1.30% YTD), as the spread on the Merrill Lynch High Yield Index tightened during the month. The pace of corporate defaults has started to increase, with Moody’s projecting that the global speculative grade default rate would reach 15% in 2009. Credit markets outperformed equity markets as high yield bonds returned +5.80% and leveraged loans returned +6.90%, a benefit to many managers who recently increased ownership of bank debt and high yield credit. The Hennessee Merger Arbitrage Index advanced +0.61% in January (+0.61% YTD). Many multiple arbitrage managers and proprietary trading desks have reduced or eliminated exposure to merger arbitrage due to deleveraging and credit concerns. However, many merger arbitrage-dedicated managers state that deal spreads are very wide and offer an attractive risk premium. 2009 deal flow is off to a good start as we have already seen several transactions, including the Wyeth-Pfizer, Terra Industries-CF Industries and several other deals. The Hennessee Convertible Arbitrage Index advanced +5.79% (+5.79% YTD), the top performing strategy for the month. After a severe dislocation in 2008, managers benefited from a tightening of credit and secondary market richening in January; a trend Hennessee Group believes will continue in 2009. The supply of convertibles has declined as new issuance has essentially shut down and convertibles continue to be retired and repurchased by companies. In addition, demand has picked up as cross-over buyers have added liquidity.
“Hennessee Group began recommending higher gold allocations for their clients at $350 and still thinks gold should be accumulated,” said Charles Gradante. “Gold is the one asset that is not someone else’s liability.”
The Hennessee Global/Macro Index advanced +0.44% in January (+0.44% YTD). International equities declined sharply in January as investor’s risk aversion increased, with the MSCI EAFE Index declining -9.88% (-9.88% YTD), on pace with U.S. markets. The Hennessee International Index advanced +0.48% (+0.48% YTD) as managers maintained low exposures and generated alpha in stock selection. While international managers reduced global exposure during the fourth quarter, which worked to their benefit in January, European and Asian managers suffered losses amid negative backdrops. The Hennessee Macro Index advanced +0.34% for the month (+0.34% YTD). Macro managers generated gains short long-term Treasuries, as many expected yields to increase. One of the most popular (and crowded) trades was profitable as the long term rates increased more than 50 basis points. Many believe that this will be a multi-year trade, but state that yields could fall on another extreme flight to quality. Many are also bullish on gold as a safe haven, hedge against the dollar and hedge against inflation. The main detractor from performance was exposure to equities, U.S. and abroad.
About the Hennessee Group LLC
Hennessee Group LLC is a Registered Investment Adviser that consults direct investors in hedge funds on asset allocation, manager selection, and ongoing monitoring of hedge fund managers. Hennessee Group LLC is not a tracker of hedge funds. The Hennessee Hedge Fund Indices® are for the sole purpose of benchmarking individual hedge fund manager performance. The Hennessee Group does not sell a hedge fund-of-funds product nor does it market individual hedge fund managers. For additional Hennessee Group Press Releases, please visit the Hennessee Group’s website. The Hennessee Group also publishes the Hennessee Hedge Fund Review monthly, which provides a comprehensive hedge fund performance review, statistics, and market analysis; all of which is value added to hedge fund managers and investors alike.
Description of Hennessee Hedge Fund Indices®
The Hennessee Hedge Fund Indices® are calculated from performance data reported to the Hennessee Group by a diversified group of over 1,000 hedge funds. The Hennessee Hedge Fund Index is an equally weighted average of the funds in the Hennessee Hedge Fund Indices®. The funds in the Hennessee Hedge Fund Index are derived from the Hennessee Group’s database of over 3,500 hedge funds and are net of fees and unaudited. Past performance is no guarantee of future returns. ALL RIGHTS RESERVED. This material is for general information only and is not an offer or solicitation to buy or sell any security including any interest in a hedge fund.
