Hennessee Group LLC has reported that strong equity markets contributed to positive performance of hedge funds in June, as the Hennessee Hedge Fund Index climbed +1.50% (+1.06% YTD). The broad market indices were mixed for the month as the S&P 500 increased +0.14% (- 0.82% YTD), the Dow Jones Industrial Average declined -1.84% (-4.71% YTD), and the NASDAQ Composite Index fell -0.54% (-5.45% YTD).
“Despite outperforming the broad market in June, hedge fund managers are still being handcuffed by a tight equity trading range, flattening of the yield curve, and low volatility,” said Charles Gradante, managing principal of Hennessee Group LLC.
“Most hedge fund managers we research believe that the bond and equity markets are underpricing risk premiums,” added Lee Hennessee, Hennessee group managing principal.
The Hennessee Long/Short Equity Index increased +1.68% (+0.52% YTD) in June. Hedge fund managers felt more confident with the stability of the equity markets and increased their exposures and positions accordingly. As a result, they were able to outperform the broad market indices. Stocks that have recently cheapened, however maintained solid fundamentals, were particularly profitable.
“Stocks look cheap relative to bonds, further emphasized by the low tax rates on capital gains and dividends, but money flows from bonds to stocks has been weak,” said Gradante.
The Hennessee Arbitrage/Event Driven Index was up in June, returning +1.09% (+0.07% YTD), as the convertible market rebounded after recent losses. This was mainly due to tightening credit spreads and an improved new issue market, even though volatility decreased to even lower levels. The merger arbitrage environment prospered from $666 billion in second quarter deal flow, but spreads remained thin, especially in safer deals.
“Money is cautiously moving back into convertible bond arbitrage as the market seems to be oversold,” stated Gradante.
The Hennessee Global/Macro Index rallied +1.55% (+3.66% YTD) in June. Hedge fund managers profited as the Dollar continued to rally against the Euro and the Yen. This was complemented by the 4% rally in crude oil. Both copper and steel sold off for the month, but gold remained flat. In equities, hedge fund managers benefited from strong international markets, as the DJ Euro Stoxx 50 and the Nikkei increased +3% and 2.3%, respectively.
“The dollar/yen trade is still in play with reduced leverage as managers borrow in yen at 50bps and buy 2 year treasuries at 3.50%,” concluded Gradante.