October 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 +3.18% in September (+20.89% YTD), while the S&P 500 increased +3.57% (+17.03% YTD), the Dow Jones Industrial Average increased +2.27% (+10.66% YTD), and the NASDAQ Composite Index advanced +5.64% (+34.59% YTD). The Barclays Aggregate Bond Index advanced +1.05% (+5.72% YTD).
“Hedge fund managers we talk to are concerned that the markets are rallying while the real economy is shrinking,” commented Charles Gradante, Co-Founder of Hennessee Group. “Liquidity is driving this market, and that is likely to continue with more than $3 trillion on the sidelines. However, liquidity driven markets eventually dry up. Hopefully, credit expansion and GDP growth arrive to support the market in 2010.”
“Hedge funds experienced a good month in September, slightly lagging equity markets,” said Lee Hennessee, Managing Principal of Hennessee Group. “Managers were able to generate gains without significant market exposure and benefited from good stock selection. Managers remain cautious as valuations appear high, and prices are being driven by momentum. Managers have increased gross exposures to normalized levels.”
The Hennessee Long/Short Equity Index gained +3.13% in September (+18.75% YTD). Despite rich equity market multiples and uncertainty surrounding the upcoming 3rd quarter earnings reports, investors continued to pile into stocks due to a favorable economic report that came out of the most recent FOMC meeting and an uptick in merger activity during the month. The S&P 500 index finished September up +3.6%, faring much better than the average loss of -1.2% the S&P has historically posted during the month of September dating back to 1929. While gains were broad based, the index was led higher by industrials (+6.6%) and consumer discretionary (+5.2%) stocks. The S&P is now up over +55% since hitting a 12-year low in March. As the equity markets continue to show strength and momentum, hedge funds have taken on additional directional risk in order to participate in the ongoing equity market rally. That said, they remain cautious and aware the market could turn sharply to the downside given current valuations and the apparent disconnect between technical indicators and fundamentals.
“Little of the bail out money given to banks seems to have been passed on to businesses or consumers. It must have gone somewhere, and it is possible that is has gone to the proprietary desks of the banks, which are putting it to work in the markets,” commented Charles Gradante. “That could lead to a potential problem if the public and institutions do not join the rally, and the banks eventually have to sell equities into a vacuum.”
The Hennessee Arbitrage/Event Driven Index gained +3.04% in September (+23.35% YTD). Positive contributions came from credit, convertible arbitrage, distressed, merger arbitrage and other strategies. Credit spreads continued to tighten, reaching back to August 2008 levels, as flows into bond funds, out of non-yielding money market funds, continued. The spread on the Merrill Lynch High Yield Index tightened from 912 basis points to 793 basis points during the month. Managers express caution as even low quality (CCC) debt has rallied strongly despite weak fundamentals. The Hennessee Distressed Index advanced +3.92% in September (+28.30% YTD). Managers benefitted from tightening spreads as well as several event specific catalysts. With some of the largest U.S. institutions in distress, managers are having no problems finding new opportunities and are very optimistic on the strategy over the next 3 to 5 years. The Hennessee Convertible Arbitrage Index advanced +3.43% (+39.29% YTD). Spreads and secondary market richening were positive contributors to the strategy. Volatility declined during the month, which detracted from performance. Managers report that there has been significant profits generated from corporations recalling and restructuring convertible issues in order to improve balance sheets. The Hennessee Merger Arbitrage Index advanced +0.48% in September (+6.65% YTD). Mergers and acquisition activity continued with Xerox’s planned purchase of Affiliated Computer Services and Walt Disney’s acquisition of Marvel Entertainment. Managers expect M&A activity to continue, but remain underinvested in merger arbitrage as they feel that there are more attractive opportunity sets currently elsewhere.
“With many companies' growth challenged, we are seeing the tip of the iceberg in M&A,” commented Charles Gradante. “With the likelihood of depressed GDP growth, companies are going to have to manufacture growth through mergers and acquisitions. In addition, the continuation of the distressed cycle will lead to many companies in search of strategic partners.”
The Hennessee Global/Macro Index advanced +3.48% in September (+22.05% YTD). Global equities rallied as the MSCI EAFE Index advanced +3.59% (+25.49% YTD), with strong performance across most emerging and developed markets, with the exception of Japan. The Hennessee International Index increased +3.67% (+18.76% YTD). Emerging markets posted strong performance. Managers continue to favor the emerging markets as they are likely to post positive GDP growth in 2009 and drive global growth for the next several years. The Hennessee Macro Index advanced +3.35% in September (+12.76% YTD). Macro managers posted their best month since May as they profited from long positions in precious metals, short the dollar, and long emerging markets. Managers profited long sugar, which is up +80% year to date, as weather conditions in India and South America have diminished supply. Treasuries increased slightly as the 2-year Treasury yield eased from 0.98% to 0.96%, and the 10-year Treasury yield edged lower from 3.40% to 3.31%. The 30-year Treasury yield fell from 4.18% to 4.05%.
“The current debate among hedge fund managers is ‘Deflation versus Inflation’,” commented Charles Gradante. “The weak dollar and deficits are inflationary, but the 30 year treasury below 4% (80 bps over the 10 year) points to deflation expectations. Hennessee research is noticing a growing propensity of hedge funds to short 20 and 30 year treasuries as yields break 4%. The U.S. Treasury is currently funding its long term debt with 3 to 10 year Treasuries. The need to finance America’s debt on the long end of the curve with attractive yields is increasingly obvious.”
* 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.
