Hedge fund advisory firm the Hennessee Group released its monthly results today, which reveal that hedge funds underperformed in November as equities markets jumped sharply.
The Hennessee Hedge Fund Index advanced just +1.70% in November (+22.40% YTD), while the S&P 500 rose +5.34% (+20.84% YTD), the Dow Jones Industrial Average increased +6.51% (+17.87% YTD), and the NASDAQ Composite Index advanced +4.86% (+35.99% YTD). The Barclays Aggregate Bond Index advanced +1.29% (+7.61% YTD).
“Hedge funds underperformed the broad markets in November as momentum continued to push security prices higher,” said Charles Gradante, co-founder of the Hennessee Group. “We believe the market is close to entering the next phase, where stock prices will be driven by earnings, rather than multiple expansion. This should serve as a better environment for hedge funds and lead to outperformance in 2010.”
“While hedge funds have generated strong returns this year and kept pace with the majority of the equity benchmarks, they have not been without their challenges,” said Lee Hennessee, managing principal of the Hennessee Group. “The rally that commenced in March has been very broad based. Stock specific fundamentals have not mattered much to investors. This has resulted in consistent losses in the short portfolios of many hedge funds and has served as a drag on performance. That said, we are beginning to see the environment for shorting improve.”
The Hennessee Long/Short Equity Index advanced +1.76% in November (+18.98% YTD). The equity markets rebounded in November due to encouraging economic data and better than expected earnings reports. Large cap stocks outperformed with the S&P 500 Index gaining +5.3% and reaching new highs for 2009. All ten sectors experienced gains during the month led by materials (+11.3%), industrials (+8.7%) and healthcare (+9.0%). Long/short equity funds generated gains in November, however lagged their traditional counterparts due to their defensive posturing and reduced exposures. Long/short equity managers remain cautious as they measure the strength and depth of the economic recovery and question current market multiples. In addition, some managers appear content maintaining reduced risk exposures through the end of the year.
The Hennessee Arbitrage/Event Driven Index gained +1.85% in November (+28.25% YTD). The spread on the Merrill Lynch High Yield Index widened slightly from 760 basis points to 765 basis points in November, hitting a low of 751 basis points mid-month. Bonds were again positive, however high yield bonds underperformed high grade and treasuries for the first time in a year. High yield and high grade primary markets remain open with significant investor interest.
The Hennessee Distressed Index advanced +3.13% in November (+36.78% YTD). Distressed funds continue to benefit from their directional bias. Many managers are now focusing on post-reorganization equities as several companies emerge from bankruptcy, including Delphi and CIT. Managers are also starting to look at the 2005 to 2007 leverage buyout vintages and expect these deals to be the next large set of defaults.
The Hennessee Convertible Arbitrage Index advanced +0.75% (+40.57% YTD). Despite a slight widening of spreads and decline in volatility, managers were able to generate gains due to strong secondary market performance and lower interest rates. New issuance remains disappointing, while redemptions remained high.
The Hennessee Merger Arbitrage Index advanced +0.74% in November (+7.84% YTD). Many managers saw allocations to merger arbitrage decline significantly after closure of the big pharmaceutical deals. However, many feel that M&A activity is going to continue and anticipate increasing allocations as new deals emerge. Many are encouraged by the pick up in bidding situations, such as Hershey and Kraft bidding for Cadbury.
The Hennessee Global/Macro Index advanced +1.46% in November (+22.34% YTD). Global equities increased, though underperformed U.S. markets, as the MSCI EAFE Index advanced +1.75% (+26.03% YTD).
The Hennessee International Index advanced +2.67% (+20.78% YTD). Emerging markets were strong, led by Latin America. Managers lost money in India due to Dubai World’s announcement of restructuring and request of a standstill agreement from providers of financing.
The Hennessee Macro Index advanced +1.00% in November (+9.73% YTD). One of the most common macro themes, long gold, was profitable in November as the S&P GSCI gold spot index increased +13.64% during the month, its largest monthly advance in 2009. The dollar short continues to be a profitable trade as the US dollar index continued to decline in November. One of the key detractors for the month was the short treasury trade. Treasures rallied as the 2-year Treasury yield dropped from 0.85% to 0.65%, and the 10-year Treasury yield fell from 3.39% to 3.20%. At the same time, the 30-year Treasury yield eased from 4.23% to 4.19%.
“The gold trade continued to snow ball in November as Central Banks have become net buyers along with major hedge funds,” said Gradante. “Never in my 38 year investment career have I seen so many respected investors focused on a single strategy.”