Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +3.04% in December (+10.05% YTD), while the S&P 500 increased +6.53% (+12.79% YTD), the Dow Jones Industrial Average advanced +5.19% (+11.02% YTD), and the NASDAQ Composite Index increased +6.19% (+16.91% YTD). The Barclays Aggregate Bond Index declined -1.08% (+6.56% YTD) while the Barclays High Yield Credit Bond Index advanced +1.81% in December (+15.11%). Global financial markets finished 2010 on a positive note as global equity, commodity and credit markets all strengthened in December.
The Hennessee Long/Short Equity Index advanced +3.08% in December to finish the year up +9.11%. Economic activity continued to strengthen in December, and the S&P ended the year with its best December since 1987. The month’s +6.5% gain represented almost half the index’s appreciation for the entire year. Managers benefited from increasing net and gross exposure levels in order to participate in the continued market rally. For the year, many long/short equity hedge funds struggled to outperform on a relative basis due in large part to the risk on and risk off trading environment that characterized most of the year.
Major macro themes such as the sovereign debt crisis and introduction of QE2 led to extreme levels of volatility and heightened correlations amongst stocks, making security selection very challenging, particularly for fundamentally based investors. In addition, many managers were conservatively positioned for most of the year with net and gross exposures levels below historical averages, resulting in additional underperformance. With the equity markets trading at 13x 2011 earnings, many long/short equity managers believe equities are still reasonably valued and also remain attractive from a technical standpoint. That said, they are concerned about the numerous headwinds that could derail the economic recovery and market rally, and therefore remain cautious entering 2011.
Arbitrage and event driven managers posted gains in December as the Hennessee Arbitrage/Event Driven Index advanced +2.66%. In addition, arbitrage and event driven sub-strategy was the top performing sub strategy for the year, increasing +12.35% in 2010. In December and for the year, managers benefited from a tightening of credit spreads and a continued rally in risk assets. The Barclays High Yield Credit Bond Index advanced +1.81% in December (+15.11%) as spreads reached levels not seen since November 2007 despite an increase Treasury interest rates. High-yield issuance remained strong, and for the year, issuance has surged 50% to a record $353 billion. The Hennessee Distressed Index increased +3.14% in December (+14.76% YTD). Distressed managers experienced gains as long biased portfolios benefited from increased risk appetites of investors. In the U.S., the default rate ended the year at 3.3%, down from 4% at the end of the third quarter and from 14.1% a year earlier. For the year, several restructured companies emerged from bankruptcy and provided significant positive performance for hedge funds. The Hennessee Merger Arbitrage Index increased +2.55% in December (+7.17% YTD).
Managers benefited from a market rally and continued deal activity. Global mergers-and-acquisitions activity for 2010 reached $2.74 trillion, up from $2.2 trillion in 2009, according to Dealogic. Credit markets continue to be supportive of deal making, and managers expect mergers to increase in 2011 as companies look past economic uncertainty to address long-term growth. The Hennessee Convertible Arbitrage Index advanced +1.36% (+10.44% YTD) in December. Convertibles followed equities and ended out the year with a strong performance in December. Credit tightened as investors continue to search for yield. Convertible valuations richened while the new issue calendar remained quiet.
The Hennessee Global/Macro Index advanced +2.70% in December (+9.32% YTD). Positive global markets helped drive gains as the Hennessee International Index climbed +2.64% during the month (+12.08% YTD) and the Hennessee Emerging Markets Index gained +2.83% (+13.65% YTD). For the year, despite the fact that global stock markets faced multiple sovereign debt scares in Europe and worries about a double-dip recession in the U.S., global markets posted gains. In Europe, positive performance was driven by Germany and England, while the PIIGS (Portugual, Ireland, Italy, Greece and Spain) detracted from performance. In Asia, several markets posted strong gains, but the largest economies, China and Japan, experienced declines. Emerging markets were strong, and managers remain optimistic on the longer term outlook.
The Hennessee Macro Index advanced +3.27% for the month (+7.96% YTD). Macro funds were a top performing strategy in December as they experienced one of their best months of the year. Managers profited from positions in long equities, long precious metals and other commodities, long oil, short the U.S. dollar, and short Treasuries. For the year, commodities have been a major source of profits as the Dow Jones-UBS Commodity Index rose +16.8% in 2010. Gold, a common hedge fund position, ended the year up +29.8%. Silver and palladium were also significant gainers, up +83.8% and +97.3%, respectively. Oil prices stayed in a narrow band between $68 and $92 a barrel, but ended the year up +15%. Throughout the year, managers made gains in currencies by being short the euro and long the yen. The European debt crisis battered the euro, which declined against the U.S. dollar.
D.C.