Short Biased Managers Have Their Best Month Since April 2005
June 8, 2006 New York, NY Hennessee Group LLC, an adviser to hedge fund investors, today announced that hedge funds declined less than the broad equity markets in May. The Hennessee Hedge Fund Index decreased -1.15% (+6.09% YTD). The broad equity market indices were also down as the S&P 500 fell -2.88% (+2.57% YTD), the Dow Jones Industrial Average was down -1.75% (+4.20% YTD), and the NASDAQ Composite Index dropped -6.19% (-1.20% YTD). The bond markets were flat in May, as represented by the Lehman Brothers Intermediate Government Corporate Bond Index, which increased +0.01% (-0.33% YTD).
Despite lower declines in May, hedge funds had a disappointing month, said E. Lee Hennessee, Managing Principal of Hennessee Group LLC. Last month?s outperformers (Asia-Pacific, Emerging Markets, and Europe) were this months underperformers.
The Hennessee Long/Short Equity Index decreased -1.52% (+5.94% YTD) in May. The S&P 500 saw its worst month since December 2002 and the worst May in over 20 years. For hedge fund managers May was troublesome on both sides of the portfolio as the beginning of the month saw momentum driven gains, hurting the short book, while the latter half of the month saw large drawdowns, negatively affecting the long side of the book. Volatility did pick up substantially, something that managers have been waiting to take advantage of, but the overriding concerns of global inflation and future rate hikes created a sharp mid-month downturn, making it difficult for managers to recover incurred losses. Homebuilders were hardest hit, followed by technology, semiconductors, and energy stocks.
Many hedge fund managers recognize that the liquidity driven equity and commodity markets of the past were impacted in May as global rate hikes induced deleveraging, which resulted in a flight to quality and reduced appetite for risk, said Charles Gradante, Managing Principal of Hennessee Group LLC. A soft vs. hard landing is the question that managers need more data on to develop portfolio conviction. Clearly, May reflected this consternation. As all major equity market averages are bouncing off their 200 day moving averages, June could be a pivotal month.
The Hennessee Arbitrage/Event Driven Index was up in May, returning +0.53% (+6.76% YTD). Convertible arbitrage hedge fund managers posted another solid month of returns, up +0.69% (+6.10% YTD). The volatility increase in the equity markets helped managers trade around positions and significant outflows have stopped. Merger arbitrage advanced +0.23% (+6.44% YTD) in May. Deal flow continues to be strong, with the most money to be made in competitive and dynamic deals, led by private equity and management led buyouts. However, typical merger deal spreads remain tight. Distressed investing hedge fund managers posted strong gains, up +1.68% (+8.89% YTD). Though managers were hurt by widening credit spreads, autos made up the difference and put managers in positive territory for the month.
The Hennessee Global/Macro Index decreased -2.93% (+4.98% YTD) in May. The Federal Reserve increased interest rates another 25 basis points on inflation fears and excess market liquidity. As a result, May saw a large correction in equity markets across the globe. Most notably was India, which finished down -12.26%, but had decreased over -14% in the course of two days mid-month. Latin America saw similar drawdowns, as did Europe, though to a lesser extent. Many managers are paying close attention to the extent which the markets rebound to determine the true strength of underlying fundamentals. May marked record and multi-year highs for metals, with gold and silver hitting 25 year highs, and copper, palladium, and platinum hitting record highs. Oil stayed within its recent trading range, despite Iranian comments to disrupt oil supplies in response to any American military action, and escalating hostilities in Nigeria. Finally, the dollar continued its fall, but was buoyed by late month comments by Chairman Bernanke that future rate hikes may be necessary.
?Many macro managers are holding their short dollar position despite the dollar finding near term support. Managers noted that the twin deficits and the dollar trending below its 200 day moving average against the euro and the yen are long-term negatives, said Charles Gradante, Managing Principal of Hennessee Group LLC. The large emerging markets correction hurt many macro managers in May.