November 12, 2012 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.12% in October (+5.02% YTD), while the S&P 500 decreased -1.98% (+12.29% YTD), the Dow Jones Industrial Average declined -2.54% (+7.19% YTD), and the NASDAQ Composite Index fell -7.45% (+14.28% YTD). Bonds were up, as the Barclays Aggregate Bond Index increased +0.20% (+4.21% YTD).
“Uncertainty about the U.S. political situation and European debt crisis as well as a major hurricane in the New York area resulted in a flight to quality and a decline in risk assets during the second half of the month. Earnings were generally underwhelming and economic news out of Europe was poor,” commented Charles Gradante, Managing Principal of Hennessee Group. “Despite some positive news as U.S. economic data came in slightly ahead of expectations and trends in China seem to support a soft landing, put option volume outpaces call option volume 4 to 1.”
“The U.S. presidential election is finally coming to a close, eliminating one of the large uncertainties for the market,” commented Charles Gradante. “The biggest risk now is the fiscal cliff and how the markets will respond to the risk of political stalemate. Managers expect market volatility to rise and will be positioned conservatively until there is more clarity.”
Equity long/short managers were down modestly in October, as the Hennessee Long/Short Equity Index declined -0.33% (+4.81% YTD). The S&P 500 fell -1.98% during the month as most sectors experienced declines. Technology, telecom and energy were the worst performers, while financials was one of the few bright spots. Managers performed well in the early stages of the month but gave back gains in the second half of the month as de-risking took place before the U.S. election amid heightened concerns about the fiscal cliff. There was significant profit taking in year-to-date winners, and many growth oriented names in tech and healthcare were down more than the market. Apple, a common long position for hedge funds, declined -10.76%. Shorting remains challenging, but there was some improvement in October as earnings were released. On the short side, many managers continue to short personal computer manufacturers and their supply chain. Managers are also finding short opportunities in the energy sector but remain relatively cautious due to political uncertainty and the fiscal cliff. If there is a resolution to the fiscal cliff, managers would position for the upside to U.S. growth and increase exposure levels.
“October was a challenging month for both the broader markets and the hedge fund industry,” said Lee Hennessee, Managing Principal of Hennessee Group. “Hedge funds managers were able to limit losses due to conservative positioning. In addition, many hedge funds were able to outperform due to superior stock selection. Correlations have declined from extreme levels and prices are starting to respond to fundamentals.”
The Hennessee Arbitrage/Event Driven Index advanced +0.57% (+6.67% YTD) in October. Bonds were up, as the Barclays Aggregate Bond Index increased +0.20% (+4.00% YTD). U.S. Treasury yields rose for the month but settled off mid-month highs as the long end of the curve steepened. The yield on 10 year Treasury increased 7 basis points from 1.57% to 1.64%. The spread of the Bank of America Merrill Lynch High Yield Master Index over Treasuries tightened 11 basis points from 5.74% to 5.63%, below its long term average of 5.80%. Managers continue to benefit from the rally in credit, but many have reduced exposure as yields have tightened significantly and bonds are likely fairly-valued to over-valued. The Hennessee Distressed Index increased +1.54% in October (+8.40% YTD). Distressed managers experienced gains in preferred equities, financials, and distressed debt. Some managers state that they are seeing a significant decline in credit quality of new issuance, which should lead to restructuring opportunities as these companies default on their obligations. The Hennessee Merger Arbitrage Index decreased -0.24% in October (+2.96% YTD). Merger funds posted losses as deal spreads widened and equity markets declined. The Hennessee Convertible Arbitrage Index advanced +0.15% (+8.09% YTD). Convertible valuations were generally weaker over the month and volumes were light. New issuance was relatively healthy. Managers were able to generate profit from tighter credit spreads and trading of new issuance.
“Arbitrage managers are becoming more optimistic. They remind us that opportunities are created when market players buy securities for reasons unrelated to the underlying value of the asset. It creates a dislocation between price and value,” commented Charles Gradante. “Global banks are buying securities across the globe regardless of value, which is driving asset prices away from their fundamental value. They are creating significant opportunity for hedge funds. However, the problem faced by managers is that the central banks have unlimited capacity to buy, and can buy for longer than any manager can remain solvent. At some point this buying will come to an end, and it will be an outsized opportunity for hedge fund managers.”
The Hennessee Global/Macro Index declined -0.62% (+3.20% YTD) in October. The MSCI All-Country World Index ended the month down -0.76% (+9.87% YTD). International hedge fund managers posted modest losses due to a net long exposure, as the Hennessee International Index fell -0.55% (+7.51% YTD). Attention in Europe was focused on the banking union, and many are concerned about the lack of progress stabilizing the banking sector. Emerging markets were also down, as the MSCI Emerging Markets Index lost -0.73% (+8.61% YTD). After a strong September, hedge fund managers were able to maintain gains, as the Hennessee Emerging Market Index was up +0.02% (+2.22% YTD). Macro managers posted losses in October, as the Hennessee Macro Index declined -2.42% (-0.41% YTD). Macro strategies continue to struggle and October was another difficult month. It was challenging because several trends of September ended quickly and reversed dramatically. Commodities came under pressure on the back of global economic concerns. The S&P GSCI declined -4.07% for the month, led by industrial metals, which declined -8.26% in October and nearly reversed the +10.19% gain in September. Despite the decline in risk tolerance, precious metals also suffered in October. Energy was down due to increasing North American supply and slack in U.S. The U.S. dollar weakened slightly, as the U.S. Dollar Index declined -0.33% (-1.54% YTD). Fixed income prices declined as U.S. Treasury yields rose for the month but settled off mid-month highs as the long end of the curve steepened.
* 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 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.