Hennessee Hedge Fund Index declined -0.78% in February (+0.12% YTD), while the S&P 500 declined -10.99% (-18.62% YTD), the Dow Jones Industrial Average
declined
-11.72%
(-19.52% YTD), and
the
NASDAQ Composite Index declined -6.68% (-12.63% YTD). Bonds also declined, as the Barclays Aggregate Bond Index declined -0.38% (-1.26% YTD).
The Hennessee Long/Short Equity Index declined -1.09% in February (-0.25% YTD). Hedge funds outperformed on a relative basis, but gave back most of Januarys gains and are essentially flat for the year. While managers remain conservatively positioned with historically low gross exposures, some have started to slowly increase gross exposure as markets are trading more fundamentally. The majority of gains this year have been driven by short positions, especially in financials, consumer discretionary and industrial sectors.
The Hennessee Arbitrage/Event Driven Index gained +0.05% in February (+2.44% YTD). Arbitrage/Event Driven strategies have outperformed long/short equity and global/macro strategies thus far this year after a very challenging 2008. The Hennessee Distressed Index declined -0.02% in February (+1.82% YTD), as the spread on the Merrill Lynch High Yield Index widened from 1626 basis points to 1638 basis points during the month.
A two month rally in high yield credit ended in February as the Merrill Lynch High Yield index declined -3.5% (+1.7% YTD), giving back some of its January gains. The Hennessee Merger Arbitrage Index advanced +0.24% in February (+0.84% YTD).
The Hennessee Convertible Arbitrage Index advanced +0.72% (+5.91% YTD). Managers generated gains from a richening in the secondary market and from their positive carry. The gains were offset by losses attributed to a slight tightening of credit spreads and an increase in interest rates.
The Hennessee Global/Macro Index declined -0.96% in February (-1.50% YTD). International equities declined sharply in February as investors risk aversion increased, with the MSCI EAFE Index declining -10.54% (-19.38% YTD), in parallel with U.S. markets. The Hennessee International Index declined -1.66% (-0.86% YTD) as managers remained conservative with low gross exposures and reduced risk.
The Hennessee Macro Index declined 1.62% for the month (-1.05% YTD). Macro managers posted gains on gold as prices increased from $913 to $939 per troy ounce during the month. The yields on long term Treasuries increased approximately 13 basis points, with the 30 year increasing from 3.58% to 3.71%. Managers lost money through their long exposure to U.S. and global equities after many increased exposure thinking equities were oversold.
Hedge funds are off to a good start in 2009, says Charles Gradante, co-founder of Hennessee Group. Hedge funds were flat the first two months of the year, while equity markets have declined almost -20%. Hedge funds are doing what they do best, preserving capital in down markets and generating alpha by managing exposures and perceptive stock selection.
We are encouraged by the positive performance after a challenging 2008, says Lee Hennessee, managing principal of Hennessee Group. Conditions have improved for hedge funds. Volatility is elevated, but not extreme; dispersion among sectors and securities has increased; and the markets are responding to fundamentals (though negative fundamentals), which is allowing funds to generate profits in their short books.
We are still seeing a negative overhang from large hedge funds that imposed gates on redemptions. We expect them to continue selling to raise cash for redemptions, says Charles Gradante.
However, we are also seeing some creative ways for investors to gain liquidity from gated funds. Most notably, there have been a series of auctions where investors can purchase fund interests in the secondary market at a discount to NAV.”
L.D.