Hedge funds were up 0.53 per cent in August, according to the Hennessee Hedge Fund Index produced by the Hennessee Hedge Fund Advisory Group consulting firm. But it was not enough to beat long-only fund managers.
Though hedge funds followed by Hennessee were back in positive territory for the month, their performance was still short of the broad market S&P 500 Index, which rose 0.60 per cent. However, hedge funds were ahead of the Dow Jones Industrial Average, which fell 0.84 per cent, and the Nasdaq Composite Index, which fell 1.01 per cent.
In the year to date, hedge funds are down 4.28 per cent, which is much less than the overall the S&P 500 (down 19.48 per cent), the Dow Jones Industrial Average (down 13.54 per cent), Nasdaq (down 32.57 per cent) and Lipper Mutual Funds (down 17.34 per cent).
Hennessee describes August as a “rebound month,” with two of the worst returns in July – Latin America and Financial Equities – bouncing back to be the two top performers in August, with respective returns of +5.55 per cent and +2.15 per cent. Macro was the third best performer with a +1.76 per cent return. Conversely, the worst performing hedge fund indices during August were the Short Biased Index (last month’s best performer), down 0.97 per cent, Healthcare/Biotech, down 0.91 per cent, and High Yield, down 0.63 per cent.
“After the lows of July, hedge funds were able to capitalize on market inefficiencies and opportunities in August,” says Charles Gradante, Managing Principal of Hennessee Group LLC. “Despite increased pressure in the media that hedge funds are shaping this market, only 10 of the 23 strategies the Hennessee Group monitors beat the S&P 500 in August. July and August illustrate how hedge funds can limit an investor’s downside exposure by outperforming the equity indices in down months and still perform well enough in up markets to generate higher compounded returns with less volatility.”
Latin America prospered as the MSCI Brazil was up +22.76 per cent, after falling 15.58 percent in July. The IMF’s $30 billion pledge to Brazil to keep its markets solvent and the assurance of foreign banks to maintain their current level of support for the nation helped to bolster confidence. In addition, Uruguay staved off a potential banking collapse with a $1.5 billion U.S. bridge loan. In the US, Financial Equities were strengthened as credit spreads tightened toward the end of the month and refinancing activity prospered as the 10-year note hit lows not seen in forty years.
In other overseas indices, the Pacific Rim index is up 1.80 per cent for the year to date. Despite this positive performance, Mr. Gradante said, “I am concerned about the impact of Japan and China on developing countries in Asia. Japan’s banking system continues to implode while China’s banking system is shackled with 115,000 state owned corporations that are not profitable. China’s banking system is insolvent but not illiquid. Both Japan and China are major lenders to Asian emerging markets. A credit crunch in Asian emerging markets could be in the making.”
Meanwhile, Short Biased managers were only mildly caught out as the S&P 500 rebounded to be up 0.60 per cent in August. The Healthcare/Biotech index staggered only slightly, mainly due to Healthsouth, which lost almost 48 per cent of its value, and dragged the healthcare sector down with it.