August 10, 2009 – New York, NY – Hennessee Group LLC, a consultant and adviser to direct investors in hedge funds, announced today that the Hennessee Hedge Fund Index advanced +3.37% in July (+15.50% YTD), while the S&P 500 increased +7.41% (+9.32% YTD), the Dow Jones Industrial Average increased +8.58% (+4.50% YTD), and the NASDAQ Composite Index advanced +7.82% (+25.46% YTD). Bonds rose, as the Barclays Aggregate Bond Index advanced +1.61% (+3.54% YTD).
“In June, we became concerned about the sustainability of the ‘Green Shoots’ and felt that momentum in equities was fading. We felt that markets had reached an inflection point where investors would be less concerned about technicals and shift their focus to fundamentals. Earnings came out, and they were better than expected, optimism returned, and markets rallied sharply,” commented Charles Gradante, Co-Founder of Hennessee Group. “The deterioration of the economy has clearly slowed, however we continue to see positive signs that we are on the road to recovery, including increases in new home sales, new orders, and production. That said, I am still cautious and see emerging signs of ‘protectionism’ in the form of dramatic reductions in external lending by G-7 institutions, which could stifle a global economic recovery (see Hennessee Group’s Declines in External Debt Elevates Concern for Global Recovery).”
“Hedge funds underperformed in July, as we would expect, but were able to capture a good portion of the market rally in July,” said Lee Hennessee, Managing Principal of Hennessee Group. “Managers opened up their net exposures to participate, but also benefited from a better than expected earnings season. However, managers remain vigilant, knowing that the markets could crack and crack quickly. The VIX is at pre-crisis August 2008 levels and that worries many.”
The Hennessee Long/Short Equity Index gained +2.89% in July (+13.39% YTD). After a brief pause in June, equities markets advanced sharply in July, with the Dow Jones Industrial Average having its best one month performance since 2002. The S&P 500 has now rallied +50% from its March low. Managers were encouraged by positive earnings, including Goldman Sachs beating estimates on record trading, and Intel’s upbeat forecast. In addition, there was positive economic news in the housing market as new home sales climbed +11% last month, representing the biggest gain in 8 years. Profits were driven by long portfolios, while hedges and shorts were generally a drag on performance. Managers generated significant profits in the materials sector, which was the top performing sector in July. Managers still have concerns about job losses, which pose a risk to an economic recovery, and, long term, managers are concerned with the U.S. budget deficits and the sharp increase in money supply.
“As of July 1st, the Fed has bought $200 billion in Treasuries while injecting $1 trillion into the banking system,” commented Charles Gradante. “The Fed’s exit strategy may be the ‘Reverse Repo’, where they sell Treasuries to banks. This strategy would allow the Fed to tighten monetary policy with less impact on interest rates and could reduce the risk of long term inflation.”
The Hennessee Arbitrage/Event Driven Index gained +3.62% in July (+18.49% YTD). As investors’ appetite for risk increased during the last three weeks of July, higher risk assets outperformed higher quality assets. The high yield index advanced +6.2% (+37.4% YTD), outperforming high grade corporate credit (+3.9% in July) and Treasuries (+0.4% in July). Commercial mortgage-backed securities (CMBS) were one of the best performing asset classes as the government advanced the legacy securities PPIP. High yield credit spreads tightened from 1,055 basis points to 922 basis points during the month, the lowest level since September of 2008, according to Merrill Lynch. The Hennessee Distressed Index advanced +5.16% in July (+23.47% YTD). Managers still expect to see more bankruptcies in 2009; however, we have already seen a significant number of defaults, with more than twenty $1 billion plus bankruptcies already this year. The Hennessee Convertible Arbitrage Index advanced +6.21% (+31.64% YTD). Spreads, interest rates and buying in the secondary market made positive contributions, while declining volatility detracted from performance. Redemptions continue to outpace new issuance in the convertible sector. Managers remain very optimistic that conditions for convertible arbitrage will provide opportunity for outsized returns for the next several years. The Hennessee Merger Arbitrage Index advanced +0.27% in July (+5.28% YTD). While M&A activity has declined from 2007 levels, managers state that there are several announced deals trading at attractive spreads. Many managers are increasing exposures and have established positions in the Wyeth-Pfizer, Schering Plough-Merck, and Pepsi Bottling-Pepsi deals. Several deals are yielding +15% on an annualized, unlevered basis.
“We have expected greater scrutiny and new regulation for the financial industry, and specifically for hedge funds, in 2009,” commented Charles Gradante. “In the energy markets, regulators are calling for hard position limits on financially settled energy contracts set by NYMEX, starting as soon as September. While the goal is to reduce speculation and volatility in the energy markets, this could potentially reduce transparency by shifting trading to over-the-counter markets and decrease liquidity. The unpredictability of government intervention continues to be one of the greatest concerns for hedge funds.”
The Hennessee Global/Macro Index advanced +4.12% in July (+15.89% YTD). Managers benefited as international equities rallied in July, with the MSCI EAFE Index advancing +9.05% (+15.19% YTD). The Hennessee International Index increased +3.27% (+12.70% YTD) as managers partially participated in the market rally. Global markets were strong as positive economic data in the U.S. gave assurances of a global economic recovery. Emerging markets, especially BRIC countries, continued to be strong performers. The Hennessee Macro Index advanced +2.67% in July (+8.24% YTD). The “reflation trade” (long commodities against short Treasuries) is still on and provided profits in July as commodities rebounded from their June pull back. Metal positions, specifically aluminum, zinc and other industrial metals, were up sharply. Precious metals, including gold, were also up modestly, a positive for portfolios. Treasuries were essentially flat in July, as the 2-year Treasury, 10-year Treasury and 30-year Treasury were little changed for the month. The U.S. dollar depreciated against the euro and the yen. Managers have concerns about the prospects for the U.S. dollar long term due to the massive increase in money supply. Several managers have expressed concerns with holding any paper currency in the current environment, looking to gold as the preferred currency.
* For a more in depth monthly review of the economy, capital markets, and hedge fund performance and strategies, the Hennessee Group offers the monthly Hennessee Hedge Fund Review (www.hennesseegroup.com/hhfr/).
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.
