Hennessee Group LLC, a consultant and adviser to direct investors in hedge funds, announced that the Hennessee Hedge Fund Index advanced +3.18% in September (+20.89% YTD), while the S&P 500 increased +3.57% (+17.03% YTD), the Dow Jones Industrial Average increased +2.27% (+10.66% YTD), and the NASDAQ Composite Index advanced +5.64% (+34.59% YTD). The Barclays Aggregate Bond Index advanced +1.05% (+5.72% YTD).
Hedge fund managers we talk to are concerned that the markets are rallying while the real economy is shrinking, says Charles Gradante, co-founder of Hennessee Group. Liquidity is driving this market, and that is likely to continue with more than $3 trillion on the sidelines. However, liquidity driven markets eventually dry up. Hopefully, credit expansion and GDP growth arrive to support the market in 2010.
Hedge funds experienced a good month in September, slightly lagging equity markets, says Lee Hennessee, managing principal of Hennessee Group. Managers were able to generate gains without significant market exposure and benefited from good stock selection. Managers remain cautious as valuations appear high, and prices are being driven by momentum. Managers have increased gross exposures to normalized levels.
The Hennessee Long/Short Equity Index gained +3.13% in September (+18.75% YTD). Despite rich equity market multiples and uncertainty surrounding the upcoming 3rd quarter earnings reports, investors continued to pile into stocks due to a favorable economic report that came out of the most recent FOMC meeting and an uptick in merger activity during the month. The S&P 500 index finished September up +3.6%, faring much better than the average loss of -1.2% the S&P has historically posted during the month of September dating back to 1929. While gains were broad based, the index was led higher by industrials (+6.6%) and consumer discretionary (+5.2%) stocks. The S&P is now up over +55% since hitting a 12-year low in March. As the equity markets continue to show strength and momentum, hedge funds have taken on additional directional risk in order to participate in the ongoing equity market rally. That said, they remain cautious and aware the market could turn sharply to the downside given current valuations and the apparent disconnect between technical indicators and fundamentals.
The Hennessee Arbitrage/Event Driven Index gained +3.04% in September (+23.35% YTD). Positive contributions came from credit, convertible arbitrage, distressed, merger arbitrage and other strategies. Credit spreads continued to tighten, reaching back to August 2008 levels, as flows into bond funds, out of non-yielding money market funds, continued.
The spread on the Merrill Lynch High Yield Index tightened from 912 basis points to 793 basis points during the month. Managers express caution as even low quality (CCC) debt has rallied strongly despite weak fundamentals. The Hennessee Distressed Index advanced +3.92% in September (+28.30% YTD). Managers benefitted from tightening spreads as well as several event specific catalysts. With some of the largest U.S. institutions in distress, managers are having no problems finding new opportunities and are very optimistic on the strategy over the next 3 to 5 years. The Hennessee Convertible Arbitrage Index advanced +3.43% (+39.29% YTD). Spreads and secondary market richening were positive contributors to the strategy. Volatility declined during the month, which detracted from performance. Managers report that there has been significant profits generated from corporations recalling and restructuring convertible issues in order to improve balance sheets. The Hennessee Merger Arbitrage Index advanced +0.48% in September (+6.65% YTD). Mergers and acquisition activity continued with Xeroxs planned purchase of Affiliated Computer Services and Walt Disneys acquisition of Marvel Entertainment. Managers expect M&A activity to continue, but remain underinvested in merger arbitrage as they feel that there are more attractive opportunity sets currently elsewhere.
The Hennessee Global/Macro Index advanced +3.48% in September (+22.05% YTD). Global equities rallied as the MSCI EAFE Index advanced +3.59% (+25.49% YTD), with strong performance across most emerging and developed markets, with the exception of Japan.
The Hennessee International Index increased +3.67% (+18.76% YTD). Emerging markets posted strong performance. Managers continue to favor the emerging markets as they are likely to post positive GDP growth in 2009 and drive global growth for the next several years. The Hennessee Macro Index advanced +3.35% in September (+12.76% YTD).
Macro managers posted their best month since May as they profited from long positions in precious metals, short the dollar, and long emerging markets. Managers profited long sugar, which is up +80% year to date, as weather conditions in India and South America have diminished supply. Treasuries increased slightly as the 2-year Treasury yield eased from 0.98% to 0.96%, and the 10-year Treasury yield edged lower from 3.40% to 3.31%. The 30-year Treasury yield fell from 4.18% to 4.05%.
D.C.