Hedge funds fell 0.78% in April, bringing the 2004 year to date return to +2.54%, according to the Hennessee Hedge Fund Index.
In comparison, the broad market indices fell even further in April, with the S&P 500 DRI Index losing 1.57% (+0.10% YTD) and the Dow Jones Industrial Average dropping 1.28% (-2.19% YTD). The Nasdaq Composite Index was down 3.71% (-4.15% YTD).
“As an asset class, hedge funds continue to protect the downside against equity and bond market declines,” stated Charles Gradante, Managing Principal of Hennessee Group LLC. “Despite this, hedge fund managers have indicated concern as to whether an upward move in interest rates will be offset by earnings expansion that exceed the market’s expectation for the third and fourth quarters.”
The Hennessee Short Biased Index was the top-performing index in April, a complete reversal March when it was the worst performer, with a return of +8.43% (+6.63% YTD). Managers capitalized on the market downturn as all broad market indices declined in April, especially the Russell, with a 5.17% drop. The second best performer for the month was the Hennessee Distressed Index, with a positive return of 1.63% (+5.40% YTD). Strong earnings, narrowing spreads, and the emergence of two high profile bankruptcies (WorldCom and PG & E) helped to boost its performance, Hennessee said.
In third position was the Hennessee Fixed Income Index, posting a return of +0.68% (+2.45%YTD).
“Bond related hedge fund managers began focusing on a potential bond market liquidity crisis, caused by a backup in the mortgage markets,” said Gradante.
“While holding mortgages have been a good investment for bankers over the last three years, banks will be net sellers as the carry trade comes to a close. Managers see more supply of bonds over demand, even when government agencies and dealers are included in the equation,” he added.
The Hennessee Latin America Index was the worst performing strategy in April, posting a loss of 7.54% (-5.23% YTD). Many investors dumped their riskier Latin American assets as the Argentine government announced it will raise pension payouts and wages for low-income state workers. Furthermore, Brazil’s debt reached 57% of GDP, far above the historic average of 35%.
The Hennessee Technology Index was the second worst performing strategy, with a decrease of 3.38% (-2.21% YTD), as there was a broad selloff in the sector, especially in small caps.
The third worst performer was the Hennessee Financial Index, posting a return of -2.74% (+2.58% YTD) as the strategy suffered from the sudden spike in Treasuries and investor jitters over the Fed’s potential rate hike.
“In the emerging markets, China is still the wild card. The recent increase in bank reserve requirements indicates a desire to slow down bank lending and, in turn, monetary inflation,” Gradante says. “However, it also is a step in preparation for write-offs of bad loans. It could get ugly.”