Hennessee Group LLC, a consultant and adviser to direct investors in hedge funds, announced that the Hennessee Hedge Fund Index gained +24.6% in 2009, while the S&P 500 advanced +24.7%, the Dow Jones Industrial Average returned +18.8%, and the NASDAQ Composite Index jumped +43.9%. Bonds also experienced broad based gains as the Barclays Aggregate Bond Index rose +5.9%, while the Merrill Lynch High Yield Master II Index gained an impressive +57.5%.
Hedge funds experienced their best year since 1999 and were able to perform in line with the traditional equity markets in 2009 despite the strong rally and moderate net exposure, says Gradante, Managing Principal of Hennessee Group. The top three performing strategies in 2009 included convertible arbitrage, emerging markets and distressed. Of these, we are particularly bullish in distressed in 2010 due to enormous opportunities still remaining and yet to come.
The Hennessee Arbitrage/Event Driven Index advanced +30.1% in 2009, driven by gains in the top two performing hedge fund strategies for the year, convertible arbitrage and distressed. Managers were able to take advantage of the massive deleveraging and forced liquidations as a result of the credit crisis in 2008 and purchase securities at very attractive valuations earlier in the year. The Hennessee Convertible Arbitrage Index, advanced +39.9%, its best year on record. Convertible bond funds benefited from elevated levels of volatility and a significant contraction in credit spreads throughout the year. In addition, the convertible market received a significant boost from cross-over buyers that were attracted to the deeply discounted valuations. Credit spreads dropped from a historic wide of 2,000 bps above treasuries to 639 bps. Distressed funds also benefited from the steep contraction in credit spreads and a long bias, as the Hennessee Distressed Index rose +43.3% for the year. Distressed managers were also able to take advantage of a growing opportunity set throughout the year, as the default rate on junk bonds reached +12.0% in late 2009, up from only +2.8% a year ago. The Hennessee Merger Arbitrage Index advanced +9.1% for the year. Merger Arbitrage was a lagging strategy in 2009 as financing was less attainable and deal flow slowed considerably throughout the year, particularly in value.
The Hennessee Long/Short Equity Index advanced +21.7% in 2009. After plunging nearly -60% from its high in October-2007 through early March-2009, the equity markets experienced a strong, broad based rally, gaining over +65% during the final nine months of the year. Long/short equity funds profited from positions in their long portfolios while short portfolios and hedges generally served as a drag on performance. Shorting was particularly difficult as some of the top performers for the year were low quality, cheap stocks. Growth stocks outperformed value with the Russell 3000 Growth Index gaining +37.0% in 2009 while the Russell 3000 Value Index advanced +19.8%. From a sector perspective, technology stocks led the way with a +59.9% gain, followed by material stocks (+45.2%) and consumer discretionary stocks (+38.8%). Hedge funds most willing to take on heightened directional risk while buying up high beta stocks that experienced the steepest sell-offs during the credit crisis were most rewarded while those funds that remained defensively positioned, and cautious, with an emphasis on fundamentals, generally lagged, particularly as the year progressed. Short biased managers suffered in 2009 as the Hennessee Short Biased Index declined -17.5%.
The Hennessee Global/Macro Index advanced +24.6% in 2009. The international equity markets participated in the broad based market rally, led by the Emerging Markets, particularly China.
The Hennessee International Index advanced +21.4% for the year, while the Hennessee Emerging Markets Index returned +39.1%. The MSCI EAFE rose +27.8%, while the MSCI Emerging Markets Index jumped +74.5% and the Shanghai SE Composite Index leaped +79.9%. The Chinese equity markets benefited from a favorable economic outlook due to unprecedented government support and a general belief the country will lead the global economy out of recession.
Another area of strength in 2009 was Latin America as the MSCI EM Latin American Index gained a strong +98.1% for the year, led higher by Brazil. While macro funds lagged the majority of strategies in 2009, the Hennessee Macro Index still managed to produce a respectable gain of +13.1% for the year. Popular themes for macro managers in 2009 included short positions in the U.S. dollar and treasuries, and long positions in oil and gold. In addition, macro managers took advantage of historically low rates, particularly in the U.S, to profit from the carry trade. The S&P Crude Oil Spot gained +77.9% for the year after selling off steeply in late 2008 while gold reached an all-time high crossing over $1,200 in November of 2009.
D.C.