Managers Reduce Exposures After January Sell Off, But Still Outperform S&P 500
March 8, 2006 New York, NY Hennessee Group LLC, an adviser to hedge fund investors, today announced that hedge funds advanced ahead of the broad equity markets in February. The Hennessee Hedge Fund Index rose +0.73% (+4.25% YTD). The broad equity market indices were mixed as the S&P 500 increased +0.27% (+2.93% YTD) and the Dow Jones Industrial Average was up +1.18% (+2.58% YTD), but the NASDAQ Composite Index fell -1.06% (+4.56% YTD). The bond markets were up slightly in February, as represented by the Lehman Brothers Intermediate Government Corporate Bond Index, which increased +0.07% (+0.05% YTD).
?Hedge funds continue to outperform the S&P 500 index, with healthcare, emerging markets, and technology leading the way, said E. Lee Hennessee, Managing Principal of Hennessee Group LLC.
The Hennessee Long/Short Equity Index increased +0.61% (+4.43% YTD) in February. After selling into the strong January rally and lowering their gross exposures, long/short equity hedge fund managers relied on their stock picking abilities to outperform the S&P 500 in February. Volatility picked up slightly, but managers were constrained by a pull back in the energy sector and several popular stocks, including Google. However, biotech provided opportunities for managers, and technology continued to strengthen as the new product cycle got underway, supported by a strong Microsoft product cycle.
Most equity managers remain upbeat on the outlook for 2006, said Charles Gradante, Managing Principal of Hennessee Group LLC. Equities are fairly valued and should grind higher in 2006, outpacing both bonds and cash, despite headwinds from a slowdown in the economy and earnings. The key concern among many managers is whether the Fed will overshoot tightening. Equity hedges have increased.
The Hennessee Arbitrage/Event Driven Index was up in February, returning +0.70% (+3.25% YTD). Convertible arbitrage hedge fund managers had a solid month, up +1.1% as Amgen issued a $5 billion convertible bond issuance, the largest ever. In addition, far less competition among hedge funds, lower premiums, and prices reflecting low long term volatility assumptions have helped convertible arbitrage managers. The merger arbitrage landscape was dominated by several hostile bids, especially in Europe, which helped managers to a +1.3% gain for the month. On the credit side, managers are increasingly more defensive.
The tightening monetary policy in Japan has accelerated the unwinding of the dollar/yen carry trade, adding to the recent sell off in the 10 year U.S. Treasury bond, said Charles Gradante, Managing Principal of Hennessee Group LLC.
The Hennessee Global/Macro Index increased +1.15% (+5.04% YTD) in February. Managers indicated that trading their gold positions was most profitable in February as gold reached $574, only to sell off to $540, and then rebound to $561. Oil was active as well, particularly following the Saudi terrorist attack. China continued its strong run amid comments over a more deregulated foreign exchange market. In Europe, rising ECB interest rates helped strengthen the euro, while the yen sold off as Japanese equities saw a correction of their recent record equity market highs.