Weak equity markets were the cause for negative performance of hedge funds in January, says Hennessee, as its Hedge Fund Index declined -0.14%.
The broad market indices were also negative for the month as the S&P 500 declined -2.44% in January, the Dow Jones Industrial Average declined -2.72%, and the NASDAQ Composite Index declined -5.20%.
The Hennessee Long/Short Equity Index declined -0.62% in January. Following four positive months of performance, equities quickly reversed their course and by mid-month, the S&P 500 was down approximately -4%. Continuing macro concerns about the U.S. dollar, inflation, and Iraqi elections, coupled with negative technology earnings releases and increased budget deficits caused a sell-off in the equity markets.
“Despite losses in the equity market, long/short equity managers were still able to generate alpha,” says Charles Gradante, managing principal of Hennessee Group LLC. “Approximately 77% of long/short equity managers outperformed the S&P 500.”
The Hennessee Arbitrage/Event Driven Index advanced +0.09% in January. Corporate credit spreads widened during the month, partially due to volatility in General Motors’ bonds following the automakers’ reduced 2005 earnings guidance. Despite the difficult credit market, distressed managers were able to recognize profits on a few company specific events. Specifically, Adelphia received bids from a number of private equity buyers and cable companies for its cable operations. Convertible arbitrage started the year on a down note, despite a pick-up in implied volatility due to the weakness in the equity market. Finally, merger arbitrage posted positive returns, as a number of large deals were consummated including AT&T/SBC Communications and Gillette/Proctor & Gamble.
“Hedge fund managers reported to the Hennessee Group that General Motors may be the ‘credit event’ in 2005 that causes spreads to widen considerably,” says Gradante. “Some feel General Motors could be downgraded to junk status within the next twelve months.”
The Hennessee Global/Macro Index advanced +0.69% in January. European and Asian equity markets followed the lead of the U.S. equity markets, providing difficulty for long/short global equity managers. Despite the Fed’s rate hike at the beginning of February and hawkish comments released as part of the minutes from the December Fed meeting, longer maturity Treasuries continued to rally and the yield curve flattened, with the 10 Year Treasury Note ending the month at 4.14%. After an extended decline over the past six months, the U.S. dollar broke its losing streak versus the Euro, with the Euro falling to $1.30.