Hedge funds in the Hennessee universe produced a positive return of +1.14% in November, bringing the year-to-date return to +17.74%, according to the Hennessee Hedge Fund Index.
The broad market indices were mixed in November, with the S&P 500 DRI Index gaining +0.83% (+22.12% YTD) and the Dow Jones Industrial Average falling -0.19% (+17.28%YTD). The Nasdaq Composite Index climbed +1.45% (+46.78% YTD).
Despite high equity valuations, managers are covering shorts because the economic fundamentals have proven to be strong and the Fed has provided for easy money, says Charles Gradante, Managing Principal of Hennessee Group LLC. This may present a dilemma if the Fed decides to increase interest rates in 2004, causing a contraction in price earnings multiples.
The Hennessee Latin America Index was the top-performing index in November for the third month in a row, with a return of +5.51% (+61.24% YTD). Most of this months gains came from Brazil, where the Central Bank indicated it expects the country to have the first current account surplus in ten years, helped greatly by their weak currency.
The second best performer for the month was the Hennessee Telecom and Media Index, with a return of +2.42% (+28.69% YTD), as consumer and business technology spending rose, following three years of weakness.
In third position was the Hennessee Value Index, posting a return of +2.01% (+21.54%YTD), as prospects for the return on capital improved as productivity hit a 20 year high of 9.4% while the GDP growth hit 8.2% for the third quarter.
The Hennessee Pacific Rim Index was the worst performing strategy, posting a loss of -2.37% (+21.68% YTD), as Japanese equities sold off (the Nikkei decline 4.35%), despite signs of economic improvement, in response to Japans central bank legislation requiring Japanese commercial banks to reduce Japanese stock market holdings on their balance sheet.
The Hennessee Short Biased Index was the second worst performing strategy in November, with a decline of -0.65% (-20.31% YTD). A flat-to-positive month for equity markets limited losses this month but managers continue to have trouble finding short selling opportunities in the market.
The third worst performer was the Hennessee International Index, posting a return of -0.30% (+17.99% YTD), as exposure to Japanese equities dragged down overall performance.
Whether future earnings justify current multiples has most hedge fund equity managers perplexed, says Gradante. The risks and potential rewards are currently no better than evenly balanced. Nevertheless, the cyclical bull market remains intact with major indices successfully testing 50 day moving averages eight times since April.