Hedge funds tracked by the Hennessee Hedge Fund Index produced a positive return of 1.92% in December, bringing the 2003 return to 19.69%.
The broad market indices were up in December, with the S&P 500 DRI Index gaining +5. 26% (+28.55% YTD) and the Dow Jones Industrial Average increasing +6.86% (+25.33% YTD). The Nasdaq Composite Index climbed +2. 20% (+50. 01% YTD).
The Hennessee Latin America Index was the top-performing index in December for the fourth month in a row, with a return of +5.84% (+70.19% YTD). Positive numbers have fueled Latin Americas growth in the last four months and there is overall feeling that it is poised for a large recovery in 2004. The spread on Brazils sovereign debt over treasuries has declined from 25% in June 2002 to 4.1% in December 2003. The United Nations, this month, said they expect a 3.5% growth rate in Latin America in 2004, compared to 1.5% for 2003.
The second best performer for the month was the Hennessee Pacific Rim Index, with a return of +4.80% (+28.67% YTD), as China attracted $50 billion in direct foreign investment in 2003, more than any other nation. In addition, annual retail sales rose 8.9% and fixed asset investments rose 30.2%.
In third position was the Hennessee Emerging Markets Index, posting a return of +4.15% (+24.49%YTD), as hedge fund managers with exposure to Latin America and the Pacific Rim were buoyed by positive economic figures.
“We are concerned about the emerging markets advance,” says Charles Gradante, managing principal. “For example, Brazils sovereign debt seems overdone and Chinas GDP growth is surrounded by creeping inflation, non-performing bank loans, and excess production capacity due to zealous foreign capital investment.”
The Hennessee Short Biased Index was the worst performing strategy, posting a loss of -1.04% (-21.26% YTD), as the strong broad market gains once again made it very difficult for dedicated short-sellers.
The Hennessee Technology Index was the second worst performing strategy in December, with an increase of +0.14% (+14.77% YTD). Momentum trading in high beta, low quality tech stocks kept technology hedge fund managers on the sideline.
The third worst performer was the Hennessee Convertible Arbitrage Index, posting a return of +0.36% (+9.37% YTD), as Parmalat, a major holding for many European convertible hedge fund managers, dragged down overall performance. Anaemic implied volatility also hampered returns.
In the full year, long/short hedge funds were up 22.18%, trailing the S&P 500 and the Dow largely due to the nature of the market drivers in 2003. For the first half of the year, the equity markets were largely driven by liquidity, macro economic fundamentals (such as GDP and consumer spending), and Iraq.
“If you didn’t have large net long exposures in April and May, you missed 45% of the equity market’s move for the year,” says Mr. Gradante. “Stock specific fundamentals didn’t turn until the third quarter, when equity hedge funds began expanding portfolio exposures.”
Money flows into distressed strategies, coupled with an improving U.S. economy, generated impressive returns for the year (+26.81%). Emerging markets also did well for the year (+24.50%) due to money flows and the expectation for a global recovery.