Hennessee Group LLC, an adviser to hedge fund investors, introduces modest gains in hedge funds for 2008. Despite frugal figures company anticipates positive environment for hedge fund industry in 2009.
Hennessee Hedge Fund Index advanced +0.51% in December (-19.15% YTD), while the S&P 500 advanced +0.78% (-38.49% YTD), the Dow Jones Industrial Average declined -0.60% (-33.84% YTD), and the NASDAQ Composite Index advanced +2.70% (-40.54% YTD). Bonds advanced, as the Barclays Aggregate Bond Index increased +3.73% (+5.24% YTD).
The Hennessee Arbitrage/Event Driven Index advanced +1.00% in December (-18.57% YTD). The Hennessee Distressed Index increased +1.27% in December (-26.30% YTD), as the spread on the Merrill Lynch High Yield Index tightened from to 1988 bps to 1812 bps during the month, after hitting a new all-time high of 2182 bps mid month.
Managers are seeing several short-term technical distressed opportunities and believe that we are on the cusp of a plethora of long-term distressed opportunities, which are likely to arise as default rates continue to accelerate over the next 12 to 18 months. The Hennessee Merger Arbitrage Index advanced +1.93% in December (-0.87% YTD).
The Hennessee Convertible Arbitrage Index advanced +3.90% (-20.87% YTD), its first monthly advance since May. Managers benefited from a tightening of credit spreads from extreme levels as well as secondary market richening and declining interest rates; a trend Hennessee Group believes will continue in 2009.
The Hennessee Long/Short Equity Index advanced +0.31% in December (-18.34% YTD). While the equity markets staged a late year rally (the S&P 500 has increased +24% since November 20), hedge fund managers generally lagged as they remained well hedged and were unwilling to take any significant directional risk.
Managers are cautious given the sharp decline in corporate earnings and the consumer-led recession; that said, they are finding attractive long-term opportunities on the long side. 2009 should present an optimistic environment for hedge funds, as it will lend itself to generating alpha via stock selection on both long and short side of the portfolio.
The Hennessee Global/Macro Index advanced +0.61% in December (-20.72% YTD). International equities staged a rally in December as investors took advantage of oversold conditions and increased risk, as the MSCI EAFE Index advanced +5.92% (-45.09% YTD), outperforming U.S. markets. The Hennessee International Index advanced +2.76% (-21.78% YTD) as managers maintained low gross exposures into year end. The Hennessee Macro Index advanced +2.06% for the month (+3.37% YTD), and is one of the top performing strategies for the year.
Many managers expect Treasury yields to increase in 2009 as yields have plummeted and are unsustainable. One of the most popular (and crowded) trades is being short Treasuries. Many managers are bullish on commodities after a significant correction in 2008 and strong fundamentals. Managers are also bullish on gold as a safe haven, hedge against the dollar and hedge against inflation.
“While the Hennessee Hedge Fund Index is down 19% this year, it has significantly outperformed equity benchmarks on a relative basis by almost 20%,” says Lee Hennessee, managing principal, Hennessee Group. “On a relative basis, hedge funds continue to prove themselves as an attractive asset class, generating a better risk-adjusted return than traditional money management. Investment committees are revisiting their mandates to increase allocations to hedge funds.”
“According to Hennessee Group research, credit spread strategies should be one of the top performing strategies to invest for 2009,” says Charles Gradante, co-Founder, Hennessee Group. “Credit spreads for high yield over Treasuries are currently more than 18%, more than 3 times its average since 1990. Credit strategy managers will be able to put up some impressive gains.”
“Year-end redemptions were significant, as the average fund returned 15% to 25% of investors’ assets. Combined with negative performance and complete liquidations, the entire hedge fund industry started 2009 at close to 50% of the capital it was at the beginning of 2008,” says Charles Gradante. “However, this should be a positive for funds as less capital will be chasing the same long/short trades, which should lead to better returns.”
L.D.