April 8, 2009 – New York, NY – Hennessee Group LLC, a consultant and adviser to direct investors in hedge funds, announced today that the Hennessee Hedge Fund Index advanced +1.37% in March (+1.09% YTD), while the S&P 500 advanced +8.54% (-11.67% YTD), the Dow Jones Industrial Average advanced +7.73% (-13.30% YTD), and the NASDAQ Composite Index advanced +10.94% (-3.07% YTD). Bonds also advanced, as the Barclays Aggregate Bond Index advanced +3.31% (+0.12% YTD), led by gains in Treasuries and High Yield.
“It was a challenging month for hedge funds,” commented Charles Gradante, Co-Founder of Hennessee Group. “Equity markets rallied strongly, while the market fundamentals really did not change. Most funds were caught with tight net exposures and were unable to participate in the rally. Managers were also hurt as the sectors they have been heavily short, such as financials, consumer discretionary and materials, were the sectors that rallied the strongest.”
“Despite the underperformance in March relative to the equity benchmarks, hedge funds are still outperforming for the year,” said Lee Hennessee, Managing Principal of Hennessee Group. “We expect that we will continue to see volatility throughout the year.”
The Hennessee Long/Short Equity Index advanced +1.60% in March (+1.01% YTD). Equity markets staged a sharp rally, increasing approximately +25% from their lows, as banks reported profitable operating earnings for the first two months of the year and the U.S. government announced additional programs to help the banking system (including the PPIP program and easing of mark-to-market accounting rules). March was a challenging month for hedge funds, which entered the month with tight net exposures. Short portfolios significantly detracted from portfolios, as the rally was largely driven by the financial, consumer discretionary, and materials sectors; all sectors where hedge funds had been largely short. Technology and healthcare/biotech were bright spots for managers, as these sectors were relative outperformers. While the strong equity rally did cause short squeezes, most managers believe that the economic fundamentals remain negative and expect opportunities to generate profits in short portfolios in the near term.
“Hennessee Group believes that hedge funds with a focus on the financial sector may potentially outperform in 2009,” stated Charles Gradante. “Not only did Citigroup and Bank of America announce a profitable January and February, but the borrowings at the Fed discount window have been steadily declining. It is possible that the banking crisis of confidence can unwind as quickly as it unfolded.”
“In view of the losses pensions took in equities in 2008 relative to the performance of their bonds, pensions are now overweight bonds and underweight equities,” said Charles Gradante. “We expect pensions to adjust their weightings and reduce bond holdings while increasing equities.”
The Hennessee Arbitrage/Event Driven Index gained +1.34% in March (+3.38% YTD), and continues to outperform long/short equity and global/macro strategies this year. Credit opportunities remain robust, with many managers increasing allocations to bank debt, high yield, and convertible bonds. The spread on the Merrill Lynch High Yield Index remains wide, increasing from 1638 basis points to 1703 basis points during the month. The Hennessee Distressed Index advanced +0.64% in March (-0.64% YTD) due to a positive carry and event specific opportunities. The Hennessee Convertible Arbitrage Index advanced +3.30% (+9.52% YTD). Managers generated gains from a richening in the secondary market and from a positive carry. After new issuance disappeared in the fourth quarter and in early 2009, the primary market rebounded in March. Managers remain optimistic as credit spreads are wide, volatility arbitrage spreads are wide and event driven opportunities are plentiful. Security selection will be critical as the default rate will continue to rise over the next 12 to 18 months. The Hennessee Merger Arbitrage Index advanced +0.63% in March (+0.96% YTD). While merger activity has slowed significantly from previous years, there were several new deals that that offered very attractive annualized spreads. The healthcare/biotech space has been especially active in recent months, including Roche buying Genentech, Pfizer purchasing Wyeth, and Merck acquiring Schering-Plough.
“Hennessee Group fears that the next banking crisis will be defaults on mortgages for commercial real estate buildings,” said Charles Gradante. “The recession has led to downsizing in companies, resulting in lower rental rates and higher vacancies. We have seen several credit managers move short positions in residential mortgage-backed securities into commercial mortgage-backed securities.”
The Hennessee Global/Macro Index advanced +0.74% in March (-1.36% YTD). International equities increased in March as investor’s assumed greater risk, with the MSCI EAFE Index advancing +5.87% (-14.64% YTD). The Hennessee International Index advanced +0.49% (-2.82% YTD) as managers remained conservative with tight net exposures, low gross exposures and reduced risk. Emerging markets were a bright spot, especially Brazil and China, which have posted gains for the year. The Hennessee Macro Index advanced -0.08% for the month (-0.80% YTD). Macro managers were essentially flat during the month. Many posted losses on a short long-term Treasuries trade as the Fed announced that it would buy $300 billion in U.S. Treasuries, which sparked buying and drove yields down. Gold continued to sell off as investors started to assume more risk and sell gold to buy other assets. Managers generated profits with long exposure to U.S. and global equities after many increased exposure thinking equities were oversold.
“As we stated in last month’s press release (February 2009), the Fed came into the market to buy Treasuries, forcing a short squeeze. The Fed purchases of Treasuries have amounted to $18 billion thus far, out of a commitment to buy $300 billion,” said Charles Gradante. “However, this may not be enough to offset the momentum for higher yields and the bubble in Treasuries.”
About the Hennessee Group LLC
Hennessee Group LLC is a Registered Investment Adviser that consults direct investors in hedge funds on asset allocation, manager selection, and ongoing monitoring of hedge fund managers. Hennessee Group LLC is not a tracker of hedge funds. The Hennessee Hedge Fund Indices® are for the sole purpose of benchmarking individual hedge fund manager performance. The Hennessee Group does not sell a hedge fund-of-funds product nor does it market individual hedge fund managers. For additional Hennessee Group Press Releases, please visit the Hennessee Group’s website. The Hennessee Group also publishes the Hennessee Hedge Fund Review monthly, which provides a comprehensive hedge fund performance review, statistics, and market analysis; all of which is value added to hedge fund managers and investors alike.
Description of Hennessee Hedge Fund Indices®
The Hennessee Hedge Fund Indices® are calculated from performance data reported to the Hennessee Group by a diversified group of over 1,000 hedge funds. The Hennessee Hedge Fund Index is an equally weighted average of the funds in the Hennessee Hedge Fund Indices®. The funds in the Hennessee Hedge Fund Index are derived from the Hennessee Group’s database of over 3,500 hedge funds and are net of fees and unaudited. Past performance is no guarantee of future returns. ALL RIGHTS RESERVED. This material is for general information only and is not an offer or solicitation to buy or sell any security including any interest in a hedge fund.
