Hedge funds followed by the Hennessee Hedge Fund Index produced a positive return of +1.24% in July,bringing the year-to-date return to +10.23%.
The broad market indices also rose in July, with the S&P 500 Index gaining +1.69% (+13.68% YTD) and the Dow Jones Industrial Average increasing +2.76% (+10.70% YTD). The Nasdaq Composite Index was up +6.92% (+29.92% YTD).
“Hedge fund managers reluctantly increased their exposure to the equity markets as the S&P 500 second quarter earnings came in above expectations [65% beat earnings estimates],” says Charles Gradante, Managing Principal of Hennessee Group LLC. “Hedge fund manager outlook was mixed due to the increase in fourth quarter earnings estimates, coupled with an underlying reservation in market fundamentals and what appears to be a liquidity driven market.”
The Hennessee Financial Equities Index was the top-performing index in July, with a return of +3.24% (+19.63% YTD), due to mortgage activity at record highs, strong fixed income issuance, and rising trading volume.
The second best performer for the month was the Hennessee Telecom and Media Index, with a return of +3.20% (+20.66% YTD). The recent downturn that hurt high beta stocks attracted capital in July, creating a rally in the sector.
In third position was the Hennessee Healthcare and Biotech Index, posting a return of +2.86% (+20.18%YTD). The majority of the gains came from the biotech side as the FDA is under a new mandate to speed up drug approval. HMO earnings were also strong for the second quarter.
The Hennessee Short Biased Index and the Hennessee Fixed Income Index tied for the worst performing strategy, posting a -1.68% (-14.31% YTD and 1.22% YTD respectively). The sudden spike in interest rates caught many fixed income investors by surprise but, given the size of the spike, fixed income managers did better than expected due to adequate interest rate hedges.
Short biased managers were once again short in the face of a broad market rally. This marks the fourth month in a row the Short Biased Index has been the worst performing strategy.
The Hennessee High Yield Index posted its first down month in 2003 with a loss of -1.37% (+12.98% YTD) as high yield managers were also impacted by the back up in interest rates.
“Going into August, equity and fixed income hedge fund managers are alarmed by the back up in Treasury yields. July’s spike in Treasury rates created problems for fixed income hedge fund managers (particularly mortgage-backs) who incurred incremental duration risk. Never in the history of fixed income markets has the duration for bonds extended as much in one month as it did in July,” says Gradante. “Consensus among equity hedge fund managers was more positive however, as the equity markets held up in face of the sell off in the bond market and its potential negative impact on economic recovery expectations.”