Hennessee Group LLC, an adviser to hedge fund investors, has found that strong equity markets contributed to positive performance of hedge funds in February, as the Hennessee Hedge Fund Index advanced +1.36%. The broad market indices were mixed for the month as the S&P 500 advanced +2.10% (-0.38% YTD), the Dow Jones Industrial Average advanced +2.63% (-0.16%), and the NASDAQ Composite Index declined -0.52% (-5.69% YTD). Hedge funds have now posted positive performance for the year, as the Hennessee Hedge Fund Index is up +1.07%, while all of the broad equity market indices are negative for the year through February.
The Hennessee Long/Short Equity Index advanced +1.18% in February. Managers participated in the market’s gain during February as all major indices, except for the technology-laden NASDAQ index, finished the month positive. Managers reported gains in their long book as economic data cued the market to move higher. Long/short equity managers increased their net long exposure during the month as they gained more confidence in the economy and stock fundamentals.
“Equity hedge fund managers have reported to Hennessee that unlike 2003 and 2004, stock prices are reacting more in line with fundamentals,” says Charles Gradante, Managing Principal of the Hennessee Group LLC. “Equity managers, however, are reluctant to increase their moderate net long exposures [40% – 50%] to the equity market for fear that 2005 performance may struggle within a trading range.”
The Hennessee Arbitrage/Event Driven Index increased +0.84% in February, as gains in merger arbitrage and credit related strategies were offset by losses in convertible arbitrage. Returns in convertible arbitrage continued to be weak, as a result of continued declines in implied volatility and capital outflows from the strategy. However, many managers have reported increasing interest in the European and Asian convertible markets, where valuations are becoming more attractive following poor performance in late 2004. Credit spreads continued to tighten, benefiting distressed and credit related strategies. Likewise, merger arbitrage returns were positive following the announcement of a number of new merger deals that are offering attractive spreads.
The Hennessee Global/Macro Index gained +2.59% in February. The environment proved to be good for macro managers, as a declining U.S. dollar was coupled with rising gold prices and a sell off in the Treasury bond market. After a strong start to February in the fixed income market, Treasuries sold off due to inflation concerns. The 10 Year Treasury ended the month at a yield of 4.38%. Likewise, the Euro advanced to $1.32 versus U.S. dollar.