Hennessee Group says the hedge fund index it maintains was up 1.84% in November, and 10.06% in the year to date, which kept it ahead of the Dow Jones Industrial Average, which was up 1.17% (+14.04% YTD), and the NASDAQ Composite Index, which climbed 2.75% (+10.26% YTD). Bonds also gained in November, as the Lehman Brothers Intermediate Government Corporate Bond Index increased +0.91% (+4.49% YTD). But only the S&P 500 DRI, which advanced 1.90% (+14.21% YTD), did better.
“All major hedge fund strategies experienced positive performance in November, with the exception of short biased managers,” says E. Lee Hennessee, Managing Principal of Hennessee Group LLC. “It continues to be a very difficult environment for short selling and as such, most hedge fund managers have added to the long side allowing their net exposures to drift higher in light of the strength of the equity markets.”
The Hennessee Long/Short Equity Index advanced +2.09% in November (+10.62% YTD), outpacing the S&P 500 DRI for the first time since May. The Dow Jones Industrial Average continued to reach new all-time highs during the month, as investors continued to warm to the idea that a soft landing is the likely scenario for the economy.
“Hedge funds have trailed equities on a relative basis in 2006 because of the unusually consistent strength in the equity markets,” adds Charles Gradante, Managing Principal of Hennessee Group LLC. “There has only been one negative month for the S&P 500 in 2006. The last time there was only one negative month for the S&P 500 was in 1995, when the Hennessee Hedge Fund Index advanced +17.70% versus +37.57% for the S&P 500.”
The Hennessee Arbitrage/Event Driven Index increased +1.27% in November (+10.41% YTD). Returns were strongest in credit-oriented strategies, as the Hennessee Distressed Index posted a gain of +1.75% (+13.08% YTD). Despite a large overhang of supply ready to be issued for announced LBOs, credit spreads tightened during the month, as debt issuance has been met with an equal amount of demand by investors. Convertible arbitrage funds were up +0.81% (+10.48% YTD) as a result of the better credit environment and an excellent new issuance calendar, although were negatively impacted by the continued decline in implied volatility. Merger arbitrage also posted a positive month, as the Hennessee Merger Arbitrage Index advanced +0.83% (+10.81% YTD). In addition to tighter merger spreads, the strategy benefited from a number of competitive or hostile bidding situations.
“The fixed income markets continue to be a conundrum for most managers,” says Gradante. “Despite falling long term Treasury yields indicating a slowdown in the economy, corporate credit spreads continue to tighten in the face of a huge amount of debt issuance.”
The Hennessee Global/Macro Index advanced +1.94% in November (+7.64% YTD). Global long/short equity funds continued to outperform their U.S. brethren, as the Hennessee International Index advanced +3.02% (+11.48% YTD). Global equity markets have generally been stronger than those in the U.S., with European equities being the top-performing region for the year. Macro funds also experienced positive performance, advancing +1.46% (+2.22% YTD).
“The decline in the U.S. dollar was beneficial for most macro managers, as was the increase in the price of gold and oil,” continues Gradante. “Still, many continued to lose money betting that yields on longer maturity U.S. Treasuries would rise, as the yield on the 10-Year Treasury Note ended the month at 4.46%. Nonetheless, macro managers are positioned to profit from the bond market when the yield curve steepens, however, geopolitical control of the yield curve is still a concern.”