Hedge fund advisors Hennessee Group say that the Hennessee Hedge Fund Index advanced +1.48% in January, while the S&P 500 advanced +1.41%, the Dow Jones Industrial Average rose +1.27%, and the NASDAQ Composite Index climbed +2.01%. Bonds were again the laggard in January, as the Lehman Brothers Intermediate Government Corporate Bond Index advanced +0.04%.
“January was a good start to the year for most funds,” said E. Lee Hennessee, Managing Principal of Hennessee Group. “The Hennessee Hedge Fund Index has outperformed the S&P 500 in each of the last three months, despite the fact that equities have been positive, indicating that the environment has been conducive to stock picking.”
The Hennessee Long/Short Equity Index advanced +1.56% in January. The equity markets continued to experience a rotation out of energy and into technology during January, says Hennessee. Many fund managers are relatively optimistic on technology, and generally feel that growth stocks are undervalued relative to value stocks.
“Most managers remain cautiously optimistic on the environment. The S&P 500 has had only one negative month in the last thirteen months and a correction seems imminent,” addedCharles Gradante, Managing Principal of Hennessee Group LLC. “While fourth quarter GDP growth surprised on the upside, earnings growth is coming in worse than expected. While not all companies have yet reported, operating earnings grew only 8.1% in the fourth quarter according to Standard & Poor’s. This represents the first time since the first quarter of 2002 that earnings have not grown 10% or greater.”
The Hennessee Arbitrage/Event Driven Index increased +1.82% in January, as all major strategies posted positive returns.
The Hennessee Distressed Index posted a gain of +1.78%, as credit spreads continued to tighten. However, bets are being made by both equity and credit managers that spreads will widen, as high yield spreads are at their narrowest level in ten years at 2.8% over Treasuries.
Convertible arbitrage funds were up +1.31% despite the continued decline in implied volatility.
Merger arbitrage also was positive, as the Hennessee Merger Arbitrage Index advanced +2.19%. According to Thomson Financial, worldwide merger and acquisition activity increased 40% in 2006 to $3.8 trillion [the second best year in history], and is already off to a good start in 2007, partly due to a buyout of Equity Office Properties, the second largest leveraged buyout in history. Through February 5, $333 billion of deals have been consummated, the best start since 2000.
The Hennessee Global/Macro Index advanced +0.90% in January.
The Hennessee International Index advanced +1.20%, slightly underperforming their U.S. brethren.
Macro funds again had a difficult month, advancing only +0.46%.
“Many macro funds were vindicated on their U.S. Treasury positions in January, as the 10 Year Treasury continued to weaken, eventually ending at 4.83%,” explained Gradante. “However, managers that had been short the U.S. dollar versus the yen were caught off guard by the decline in the yen in January. The yen carry trade has now moved into non U.S. dollar currencies [i.e. the Euro and Australian dollar]. If investors become more risk averse with respect to the carry trade, U.S. equities could be at risk.”