Hennessee Group LLC announced that hedge funds declined in October, in line with all major indices.
The Hennessee Hedge Fund Index fell -1.32% (+4.74% YTD). The broad equity market indices also fell as the S&P 500 decreased -1.67% (+1.04% YTD), the Dow Jones Industrial Average was down -1.22% (-3.19% YTD), and the NASDAQ Composite Index lost -1.46% (-2.54% YTD). The bond markets were also down in October, as represented by the Lehman Brothers Intermediate Government Corporate Bond Index, which decreased -0.55% (+0.49% YTD).
“Hedge funds failed to generate any alpha (performance above market averages) in October, almost a complete reversal of September’s performance,” said E. Lee Hennessee, managing principal of Hennessee Group LLC. “Short biased equity managers continue to have a good year (+13.22%).”
The Hennessee Long/Short Equity Index decreased -1.37% (+4.04% YTD) in October. Hedge fund managers generally increased their gross and net exposures in October, looking for a fourth quarter rally, and were caught by the market’s high downside volatility and poor investor sentiment.
Though economic data was mixed and earnings were generally positive, equities declined as a result of a broad market sell off, particularly in energy. Gains on the short side were not enough to cover losses on the long side, but managers did take the decline in equities as an opportunity to add to long positions and cover short positions.
The Hennessee Arbitrage/Event Driven Index was down in October, returning -0.73% (+3.15% YTD). Convertible arbitrage managers had a relatively uneventful month in October (-0.1%) due to poor new issuance and general weakness in the credit market. However, the VIX ticked up slightly from 12 to 15 and redemptions have slowed. Merger arbitrage managers (-1.3%) experienced mixed performance in October as, on a positive note, the AT&T/SBC and MCI/Verizon deals were approved but, on the other hand, the Guidant/Johnson & Johnson and the IMS Health/VNU deals experienced problems. Distressed managers (-0.2%) were negatively affected by the higher yield on the 10 year Treasury and static credit spreads of 3.6% in the background of bidders lining up for auto parts suppliers (Delphi, Collins & Aikman, Lear, Visteon).
“Arbitrage strategies continue to be impacted by a flattening of the yield curve and general weakness in the credit markets due to mixed economic data and higher event risk, especially the ease and speed of Delphi’s bankruptcy filing,” said Charles Gradante, managing principal of Hennessee Group LLC.
The Hennessee Global/Macro Index declined -1.99% (+8.47% YTD) in October. All major markets were down for the month, with oil and gold both selling off as well, and the economy is looking at two more Fed interest rate hikes by year end. Inflation also showed itself, as the CPI saw a +4.7% annualized increase in September and core CPI saw a +2% annualized increase. However, GDP came in better than expected and the dollar was strong throughout the month against both the euro and yen. Emerging market stocks declined sharply (-6.6%), while European stocks declined -2.4% and the Nikkei was flat at +0.2%.
“The rise in yield of the 10 year U.S. Treasury above prior resistance levels in October has caused many macro managers to position themselves for a sell off in the government bond market,” concluded Gradante.