The Hennessee Hedge Fund Index rose just over 1 percent in January, even as most major indexes fell, including the Dow Jones Industrial Average, NASDAQ Composite Index, the S&P 500 and the Barclays Aggregate Bond Index.
“Hedge funds had a great start to the year, led by arbitrage strategies,” says Charles Gradante, Co-Founder of Hennessee Group. “While equity markets were down between -6% and -10%, hedge funds were up +1%. On a relative basis, hedge funds outperformed by more than +10%, protecting a significant amount of capital.”
“We are encouraged by the $6.5 billion that poured into mutual funds during the last week of January,” says Lee Hennessee, Managing Principal of Hennessee Group. “We continue to monitor fund flows and believe that if this trend continues, it could be basing and a bullish sign for equity markets.”
The Hennessee Long/Short Equity Index advanced +0.90% in January (+0.90% YTD). The broad equity markets declined sharply in January, experiencing the worst start to a new year in history, due to the concerns over the contracting economy and weaker than expected earnings reports. Hedge funds have maintained low gross and net exposures, as well being overweight defensive sectors, such as healthcare, which was the best performing sector in January. Managers were also able to generate significant gains on their short books. Managers profited from identifying shorts on expectations of missing earnings, as only 55% of companies had met earnings expectations in January, the lowest percentage since 2001. Many focused short exposures on financials and consumer discretionary names, particularly retail.
“Hennessee Group has heightened concerns about the largest upsurge in unemployment in China’s history. Hennessee Group research shows that China is moving from an export to import driven economy, dependent on internal consumption,” says Charles Gradante. “We expect China to sell dollars against the Yuan to strengthen their currency in order to increase jobs and increase purchasing power of American goods. China recognizes it needs to become more of a consuming economy of American goods.”
JT