Hennessee Group LLC, a consultant and adviser to direct investors in hedge funds, announces that the Hennessee Hedge Fund Index advanced +3.37% in July (+15.50% YTD), while the S&P 500 increased +7.41% (+9.32% YTD), the Dow Jones Industrial Average increased +8.58% (+4.50% YTD), and the NASDAQ Composite Index advanced +7.82% (+25.46% YTD). Bonds rose, as the Barclays Aggregate Bond Index advanced +1.61% (+3.54% YTD).
In June, we became concerned about the sustainability of the Green Shoots and felt that momentum in equities was fading. We felt that markets had reached an inflection point where investors would be less concerned about technicals and shift their focus to fundamentals. Earnings came out, and they were better than expected, optimism returned, and markets rallied sharply, says Charles Gradante, co-founder of Hennessee Group.
The deterioration of the economy has clearly slowed, however we continue to see positive signs that we are on the road to recovery, including increases in new home sales, new orders, and production. That said, I am still cautious and see emerging signs of protectionism in the form of dramatic reductions in external lending by G-7 institutions, which could stifle a global economic recovery.
Hedge funds underperformed in July, as we would expect, but were able to capture a good portion of the market rally in July, says Lee Hennessee, managing principal of Hennessee Group. Managers opened up their net exposures to participate, but also benefited from a better than expected earnings season. However, managers remain vigilant, knowing that the markets could crack and crack quickly. The VIX is at pre-crisis August 2008 levels and that worries many.
As of 1 July, the Fed has bought USD200 billion in Treasuries while injecting USD1 trillion into the banking system, says Charles Gradante. The Feds exit strategy may be the Reverse Repo, where they sell Treasuries to banks. This strategy would allow the Fed to tighten monetary policy with less impact on interest rates and could reduce the risk of long term inflation.
We have expected greater scrutiny and new regulation for the financial industry, and specifically for hedge funds, in 2009, continues Charles Gradante. In the energy markets, regulators are calling for hard position limits on financially settled energy contracts set by NYMEX, starting as soon as September. While the goal is to reduce speculation and volatility in the energy markets, this could potentially reduce transparency by shifting trading to over-the-counter markets and decrease liquidity. The unpredictability of government intervention continues to be one of the greatest concerns for hedge funds.
L.D.