Hedge funds monitored by the Hennessee Hedge Fund Index produced a positive return of +0.49% in June, bringing the 2004 year to date return for the index to +2.28%.
All of the broad market indices were positive for the month, with the S&P 500 DRI Index +1.95% (+3.45% YTD), the Dow Jones Industrial Average +2.42% (-0.19% YTD) and the Nasdaq Composite Index +3.07% (+2.25% YTD).
The Hennessee Latin America Index was the top-performing index in June, with a return of +2.18% (-3.68% YTD). Having suffered a -6.29% drop in April, the sector bounced back as managers began to increase their risk tolerance. Brazil and Argentina were both up for the month, +4.8% and +1.5% respectively, as measured by the MSCI. Investors are mildly encouraged by some gestures made by President da Silva regarding potential guaranteed returns in some civil projects for investors.
The second best performer for the month was the Hennessee Distressed Index with a return of +2.10% (+7.12% YTD). Capital flows turned positive in June after nearly two months. By month-end, high yield mutual funds reported net inflows of $312 million, lending support to valuations in high yield and distressed. Spreads tightened even more as evidenced by the contraction of the Merrill Lynch High Yield Index spread to 404bps from 427bps at the beginning of the month.
In third position was the Hennessee Value Index, posting a return of +1.43% (+3.74%YTD). With geopolitical concerns diminishing somewhat post the Iraqi handover, investors began to focus more on fundamentals allowing value mangers to benefit.
For the first time in years (maybe ever?), the Hennessee Convertible Arbitrage Index was the worst performing strategy, with a decrease of -1.42% bringing their year to date performance into negative territory (-0.49% YTD). A good portion of the contraction in convertibles occurred following the two cash takeovers of Kroll and Mandalay, which led to premium contractions across the convertible universe. New issuance remained weak; Year-to-date total is just under $32 billion, which is less than what was raised in May and June of last year alone.
The Hennessee Healthcare and Biotech Index was the second worst performing strategy, posting a loss of -1.24% (+4.07% YTD). HMOs were weak as political pressure is making it difficult for them to raise healthcare premiums. Some oncology names were down as investors took profits following the ASCO Conference.
The third worst performer was the Hennessee Telecom and Media Index, posting a return of -1.14% (-5.27% YTD). Investors are somewhat doubtful of the sustainability of the recovery in TMT. This concern was highlighted again in July as two high profile negative pre-announcements form Conexant and Veritas created a wave of selling in telecoms and technology.
“While hedge fund performance is respectable, most managers are disappointed with the inability of their portfolio to breakout of a trading range,” says Charles Gradante, Managing principal of Hennessee Group. “Managers report that while the steepness of the yield curve is still accommodative to real GDP growth, the uncertainties related to oil, Iraq and year-over-year earnings comparisons are stifling breakout moves through technical barriers. Managers across all strategies like what they are invested in but see no reason to sell out of or add to their respective portfolios, accounting for the low trading volume. Anticipating the full force of second quarter earnings and economic data, we are in a holding pattern until portfolio catalysts are monetized by the market.”