Guest post from the Hennessee Group.
Hedge Funds Gain as Market Heads Higher
December 16, 2013 – New York, NY – Hennessee Group LLC announced today that the Hennessee Hedge Fund Index increased +1.19% in November (+11.18% YTD), while the S&P 500 gained +2.80% (+26.62% YTD), the Dow Jones Industrial Average increased +3.48% (+22.76% YTD), and the NASDAQ Composite Index jumped +3.58% (+34.46% YTD). Bonds were negative on the month, as the Barclays Aggregate Bond Index lost -0.37% (-1.46% YTD).
“2013 is shaping up to be an exceptional year for the equity markets.” commented Charles Gradante, Co-Founder of Hennessee Group LLC. “The S&P 500 was up in November making is some sort of record. For the first eleven (11) months, the market was up in 9 months with 7 or those 9 up months over +2.00% or more. You have to go back to 2006 to find more positive months (10) within the first 11 months of the year, however, in 2006 only 4 of these positive months were above +2.00%. So, 2013 is truly a unique year.”
“The long/short hedge fund strategy cannot outperform a market with 9 of the first 11 months up over +2%.” concluded Charles Gradante. “These statistics represent a market on espresso momentum and valium complacency. Empirical evidence indicates that the hedge fund model requires on average 3 down months in the -2% area with volatility above 18, as measured by the VIX, in order for the short portfolio to add ‘alpha’.”
“To complicate matters further, managers underperformed the S&P 500 if they didn’t own the top 15 S&P 500 performers through November like Netflix (+283%), Micron Technology (+264%), Best Buy (+256%) and 12 others that were up over +100%.” added Lee Hennessee, Co-Founder of Hennessee Group LLC.
Equity long/short hedge funds were positive in November, as the Hennessee Long/Short Equity Index gained +1.53% (+16.97% YTD). The best performing sectors were healthcare (+4.49%), financials (+4.37%), and information technology (+3.64%), while underperforming sectors were telecommunications (-2.63%), utilities (-2.35%) and energy (+0.50%). The market continued the strong rally that started in September, as global economic momentum continues to build and monetary policy continues to dominate the markets. The U.S. government shutdown seemed to have had little effect on the economy, as recent economic data points to a +2.8% expansion for the third quarter, the strongest quarter of growth in 2013. One interesting statistic noted by J.P. Morgan Asset Management highlights the 52-week rolling correlation between the returns of the S&P 500 and the Citigroup G10 economic surprise index (ESI), which measures how strong economic data releases are relative to consensus expectations. The correlation has turned negative for the first time since 2010, quantifying what many already seem to know in that the market is currently treating bad economic news as good news, as it leads to more accommodative policy.
The Hennessee Arbitrage/Event Driven Index rose +0.81% in November (+9.05% YTD). The Barclays Aggregate Bond Index lost -0.37% (-1.46% YTD) as interest rates rose in November. High yield also increased as the Merrill Lynch High Yield Master II Index increased +0.47% in November (+6.83% YTD). High yield spreads decreased rather modestly, losing 9 basis points to end the month 427 basis points over treasuries as investor’s appetite for risk continued to increase. The Hennessee Distressed Index climbed +0.53% in November (+12.76% YTD). Distressed portfolios were also helped by a strong market. The Hennessee Merger Arbitrage Index gained +0.26% in November (+6.54% YTD). Managers continued to post gains as deal spreads tightened and markets rallied. The Hennessee Convertible Arbitrage Index lost -0.12% in November (+6.58% YTD).
“Many managers fear December may be a rougher month than expected. ‘Tapering’ is back on the table, as the Fed’s unemployment benchmark at 6.5% for ‘tapering’ to begin, coupled with the recent unemployment report of November, has many hedge fund managers nervous that the Fed will ease off its stimulus program which has fueled a major portion of the stock market rally.” added Charles Gradante.
The Hennessee Global/Macro Index gained +1.00% in November (+4.88% YTD).
“Macro managers experienced mixed results as commodities sunk and global equity markets, for the most part, rallied.” commented Dean Rubino, President of Terrapin Asset Management, LLC. “Macro managers see opportunities in China, Japan and Europe. As fears of China’s hard landing subsided, Japan is on the right course to correct two decades of deflation and Europe’s problem countries of Spain, Italy and Greece have turned for the better. However, macro managers realize that they are trading in a global market that has been feeding on ‘global leverage’ and that many economies will pay the price sometime in the future…potentially causing the next panic zone.”
The Dow Jones UBS Commodity Index fell -0.81% (-10.68% YTD), while the MSCI ACWI Index rose +1.24% (+18.34% YTD) and the MSCI EAFE Index gained +0.56% (+17.76% YTD). The Hennessee International Index gained +1.99% (+7.11%). Gains in Israel, Denmark, Ireland, Germany and Japan were offset by weakness in Indonesia, Colombia, Peru, Thailand and Norway. Emerging markets were mostly negative for November, as the MSCI Emerging Market Index lost -1.56% (-3.50% YTD), while, the Hennessee Emerging Market Index gained +1.82% (+6.52% YTD). The threat of tapering in the U.S. is weighing on external funding focused countries such as BRIC countries India (-3.41%) and Brazil (-6.82%), while China gained +4.85% as the Third Plenum acknowledged the existing growth model may have reached the end of its lifespan, giving way for policymakers to allow the market to play a more decisive role in resource allocation. The Hennessee Macro Index increased +1.29% for the month of November (-1.55% YTD).
Fixed income managers were down modestly in November as bond yields rose for the month with the 10-Year U.S. Treasury ending the month at 2.75%, up from 2.57% in October. Commodities posted sharp declines for the month, with gold, silver and platinum losing -5.47%, -8.75% and -5.89% for the month, respectively. The U.S. Dollar was up modestly against major currencies, ending November up +0.60%. The Euro returned +0.05% for the month, while the Japanese Yen decreased a significant -4.15%. Crude oil continued its slide, losing -3.80% for the month while natural gas gained +6.61% for the month.
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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 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.
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