The average hedge fund in the Hennessee Hedge Fund Advisory Group universe was up +0.72 per cent in January, according to the Hennessee Hedge Fund Index.
With all the main markets were down for the month – the S&P 500 Index was down -2.60 per cent, the Dow Jones Industrial Average down -3.45 per cent, and the Nasdaq Index down -1.09 per cent – hedge funds have again proved their defensive qualities.
“Hedge funds are off to a solid start in a time when the markets are still exhibiting some of the issues that plagued 2002,” says Charles Gradante, Managing Principal of Hennessee Group. “However, Iraq and its aftermath are certainly key concerns of hedge fund managers, with the success of [Alan] Greenspan’s deflationary efforts and the weakening of the dollar coming a close second and third.”
Hennessee says several hedge fund strategies have done remarkably well since the turn of the year, with the High Yield index being January’s top performer with a return of +3.24 per cent. “Even as equities sold off, high yield stayed resilient, indicating that credit spreads are beginning to stabilize after the credit shock of the summer of 2002,”explains Hennessee Group.
January’s second top performer was the Convertible Arbitrage Index, with a positive return of +2.51 per cent, reflecting a particularly benign environment for convertibles. As the correlation between equities and high yields diverged (S&P 500: -2.60 per cent, Merrill Lynch High Yield Index +3.00 per cent), convertible arbitrage hedge fund managers reported they were able to make money on their stock shorts and the firming of credit risk.
Event-driven hedge fund managers posted a return of 2.38 per cent, the third highest strategy in January, mainly due to successful distressed and high yield spreads. “The steady credit spreads in a sell-off environment may be the first indicator that investors are looking past their fear of corporate fraud and seeing that balance sheet restructuring and solid fundamentals can be realized within acceptable risk/reward parameters ,” says Gradante.
Short biased hedge funds managers posted a -1.54 per cent return, the worst performing strategy for the month. Hennessee says the rally in the beginning of 2003 caused many short sellers to abandon their shorts, leaving them out of the market during the sell off late in January. “Many short sellers believe that rallies do not have any legs and have resumed their shorting in expectation of an invasion of Iraq within the next month,” explains Hennessee Group.
“Whether you are a net long or net short player in this market, you must be a trader, not an investor, until stability comes back,” concludes Gradante.