Hedge fund advisory the Hennessee Group reports that the Hennessee Hedge Fund Index declined -1.95% in July (-3.23% YTD). At the same time, the S&P 500 declined -0.99% (-13.71% YTD), the Dow Jones Industrial Average advanced +0.25% (-14.22% YTD), and the NASDAQ Composite Index advanced +1.42% (-12.30% YTD). Bonds fell, as the Lehman Aggregate Bond Index declined –0.08% (+1.05% YTD).
“Hedge funds underperformed in July due to sharp reversals in the equity markets during the second half of the month,” said E. Lee Hennessee, managing principal of Hennessee Group. “One of the most common and profitable themes among managers for the first half of the year—short financials and long energy—experienced a very sharp reversal in July.”
The Hennessee Long/Short Equity Index declined -1.31% in July (-2.89% YTD). Many managers were short financials and posted losses as the sector rallied strongly in the second half of July, with the S&P Banking Index increasing +48.68% from its low point in mid-July. In addition, managers who were long energy suffered losses as the S&P Energy Sector declined -14.00% in July.
One of the top performing equity strategies in July was healthcare and biotechnology hedge funds, which were on average up significantly in July due to a flurry of merger and acquisition activity and renewed interest in the sector.
“Equity managers remain very cautious and entered July with the lowest net exposure in 4 years,” said Charles Gradante, managing principal of Hennessee Group. “Hedge fund managers are very cautious due to U.S. housing declines, poor economic data, and higher commodity prices. Most are unwilling to take a directional bet and are maintaining cash positions in preparation for better future investment opportunities.”
The Hennessee Arbitrage/Event Driven Index declined -1.48% in July (-2.26% YTD). Most hedge fund managers were hurt as credit spreads widened from 7.53% to 8% over Treasuries.
The Hennessee Distressed Index declined -1.12% in July (-2.33% YTD) due to renewed credit concerns and wider spreads.
The Hennessee Merger Arbitrage Index advanced +0.70% in July (+2.36% YTD). Managers state conditions are getting more attractive as spreads on deals remain somewhat wide due to credit and stock market concerns, but the quality of deals are improving. Most expect deal activity to continue, driven by strategic buyers looking to purchase assets at depressed prices.
The Hennessee Convertible Arbitrage Index declined -2.33% in July (-2.66% YTD). Spreads and cheapening of the secondary market caused losses, which were partially offset by gains in volatility, as the VIX hit a high of 28.5 mid-month.
“Given a global economic slowdown, the run up in commodities was long in the tooth and most were expecting a pull back at some point in the near term,” said Gradante. “However, most believe that this is a short term correction in the long term bull trend for commodities, which is still intact but with less momentum. Many believe that the demand for agricultural commodities and oil may continue to outweigh supply for many years to come.”
The Hennessee Global/Macro Index declined -3.03% in July (-5.01% YTD), the worst month since January 2008. International equities continued to decline in July with the MSCI EAFE Index declining -3.28% (-15.57% YTD). Performance for international long/short equity funds was worse than U.S. funds, as the Hennessee International Index declined -4.13% (-6.40% YTD). Emerging markets, especially Latin America and emerging Europe, detracted significantly from international portfolios. The Hennessee Macro Index declined -1.82% for the month (+4.04% YTD). Managers suffered losses due to a sharp reversal in commodities, as the Reuters/Jefferies CRB index of 19 commodities plunged -10.0% in July, the greatest monthly loss for the index in 28 years. In addition, though many had expected a correction in oil prices, they were surprised by the -20.0% decline from the record $147.27 a barrel price on July 11th to early August.