The Hennessee Hedge Fund Index universe of hedge funds was up 3.04 per cent in April, bringing the year to date return to +4.03 per cent. However, the broad market indices also rallied strongly in April, with the S&P 500 Index gaining +8.30 per cent (+4.89 per cent YTD) and the Dow Jones Industrial Average increasing +6.11 per cent (+1.66 per cent YTD). The Nasdaq Index was up +9.18 per cet (+9.65 per cent YTD).
“The market may be on the verge of a momentum breakout but fundamentals are insufficient to sustain the momentum we experienced in April,” says Charles Gradante, Managing Principal of Hennessee Group LLC. “Other factors contributing to a low conviction by hedge fund managers are the lack of insider buying, reduced foreign investment, 10 year highs in unemployment, and a lack of pricing power.”
The Hennessee Latin America Index was the top performing index for the second month in a row with a return of +14.61% (+19.63% YTD). Brazil was the main driver in the region once again as U.S. Treasury Secretary John Snow said he was “deeply impressed” by Brazil’s new government and market perception has seemingly turned from distrust to near confidence. Additionally, Argentina’s GDP grew by 5.8% in the first quarter and their industrial production was 21.4% higher than this time last year.
The second best performer for the month was the Financial Equities Index, with a return of +8.23% (+7.42% YTD). April marked the seventh straight month that spreads have narrowed; they are now back to where they were before March 2000. In third position was the? Telecom and Media Index, posting a return of +5.84% (+5.08%YTD) for April boosted by the large NASDAQ increase and AOL’s share price jumping 26%.
“The broad market has been chasing beta, causing some difficulty for hedge fund managers, who generally have been beta neutral to reflect their uncertainty as to the direction of the market,” claims Gradante.
The Short Biased Index posted a -5.47% (-6.92% YTD) return in April, the worst performing strategy for the month. Hedge fund managers holding large short positions were caught out by the market’s quick turnaround and could not cover their shorts in time to completely mitigate losses. The current market situation also makes it very hard for short sellers to find good shorts that are not overcrowded. The Market Neutral Index followed with a loss of -0.23% (-0.39 YTD) as market neutral manager’s shorts appreciated slightly more than their longs. The Regulation D Index rounded out the bottom three with a gain of +0.44% (+2.31% YTD).
“The big debate over Bush’s tax plan is somewhat negated because whatever happens at the Federal level will likely be offset by tax increases and spending cuts at the State and local levels as they struggle to balance budgets,” concludes Gradante.