September 8, 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 +1.85% in August (+17.30% YTD), while the S&P 500 increased +3.36% (+12.99% YTD), the Dow Jones Industrial Average increased +3.54% (+8.20% YTD), and the NASDAQ Composite Index advanced +1.54% (+27.40% YTD). The Barclays Aggregate Bond Index advanced +1.04% (+4.62% YTD).
“There was good economic news released in August, specifically housing and manufacturing data. However, our expectations for future growth and a V-shaped recovery are tempered. Government spending continues to drive demand, while the private sector has been largely absent. This dynamic is not sustainable,” commented Charles Gradante, Co-Founder of Hennessee Group. “In addition, equity markets are no longer undervalued. The P/E ratio for the S&P 500 Index has gone from a March low of 10x to over 18x during the month of August. With September being one of the worst months historically, we are cautious of a pull back in the markets.”
“Hedge funds continued to lag the surging equity markets, as we would expect given their short portfolios and hedges,” said Lee Hennessee, Managing Principal of Hennessee Group. “Managers have opened up their exposures to benefit from the market rally. However, given the uncertainty around the economy, most managers are looking to generate gains due to stock selection, rather than beta exposure as there is potential for a correction.”
The Hennessee Long/Short Equity Index gained +1.88% in August (+15.27% YTD). The U.S. equity markets continued their upward momentum in August boosted by positive economic data, particularly in the U.S. housing market and manufacturing sector. Financials were the primary driver of the equity markets, up a strong +12.9% in August. Financials gained support during the month on news several hedge fund managers were beginning to build significant equity positions in the financial sector, particularly Citigroup, which jumped +57% during the month. Many managers are also focusing on “franchise-type” businesses that have strong free cash flow, solid balance sheets, pricing power and the ability to increase market share. Going forward, managers will remain cautious with their exposures across sectors and rely largely on individual security selection as it is widely believed the market has gotten ahead of itself in recent months and is due for a correction.
“We have seen a steady rise in U.S. manufacturing levels over the past several months, which is certainly a positive sign,” commented Charles Gradante. “However, a lot of this is being driven by government stimulus and subsidies, such as the ‘cash-for-clunkers’ program. I am also concerned that the increase in manufacturing activity may be largely due to a weaker dollar, which makes exports more attractive. Thus, the manufacturing data may be more reflective of the currency situation rather than an actual resumption of growth.”
The Hennessee Arbitrage/Event Driven Index gained +2.10% in August (+19.89% YTD). Positive contributions were wide spread with credit-related and convertible arbitrage strategies performing strong and merger arbitrage generating consistent, modest gains. Credit markets continued their strong rally with high grade returning +2.2%, its fifth straight positive month, and high yield returning +2.0%, its sixth straight positive month. The spread on the Merrill Lynch High Yield Index tightened further from 922 basis points to 912 basis points during the month, hitting a low of 857 basis points during the month. The Hennessee Distressed Index advanced +2.58% in August (+24.40% YTD). Distressed positions continued to benefit from the rally in credit. Managers remain optimistic on the opportunity set for the strategy and expect continued defaults. They report that the maturity schedule of bonds in the U.S. will require an acceleration of refinancing activity starting in 2011 with the credit markets needing to absorb $1 trillion in high yield refinancing over the next five years. The Hennessee Convertible Arbitrage Index advanced +2.96% (+34.53% YTD). Spreads, interest rates and buying in the secondary market made positive contributions. Redemptions remained high in August, with buybacks and tender offers accounting for almost 75% of the redemption volume. Managers also report that competition among prime brokers is increasing, and funds are seeing improvements in financing terms. The Hennessee Merger Arbitrage Index advanced +1.18% in August (+6.20% YTD). Positive performance was largely from pharmaceutical risk arbitrage deals, which benefited from modest spread tightening. Managers state that spreads should continue to tighten as liquidity continues to increase. However, greater liquidity should also lead to a pick up in activity.
“We agree with the consensus view that emerging markets will be the major driver of global economic growth for the foreseeable future,” commented Charles Gradante. “Thus, we are optimistic on emerging market strategies. However, we are cautious on China, which experienced a significant decline in August. We have some concerns that China’s stimulus was driving excessive valuations in the stock market.”
The Hennessee Global/Macro Index advanced +1.87% in August (+18.19% YTD). Global equities rallied as the MSCI EAFE Index advanced +5.16% (+21.14% YTD), driven largely by European markets. There are now clear signs that the global financial system has stabilized and a recovery is underway. The concern now becomes the extent to which it is priced into equity markets and what kind of recovery will unfold. The Hennessee International Index increased +1.83% (+14.51% YTD). Emerging markets displayed weakness, especially China, which officially entered a bear market as markets declined more than -20% in August. Many are concerned about the quality and sustainability of the Chinese stimulus program. Managers are expecting considerable macro uncertainty with markets likely to experience volatility. The Hennessee Macro Index advanced +0.83% in August (+9.06% YTD). The “reflation trade” (long commodities against short Treasuries) is still widely held among macro managers. Managers continued to generate gains in metal positions as industrial metals, silver and zinc performed well and more than offset losses from increases in Treasuries. The 2-year Treasury yield dropped from 1.13% to 0.98%, and the 10-year Treasury yield fell from 3.50% to 3.40%. At the same time, the 30-year Treasury yield decreased from 4.31% to 4.18%.
* 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.
