Friday, October 14, 2011
HEDGE FUNDS CLOSE VOLATILE 3Q11 WITH BROAD-BASED LOSSES
Weakness concentrated in Equity Hedge, Emerging Markets; Quarterly decline of -6 percent is 4th worst in history
Hedge funds ended the volatile 3Q11 with the HFRI Fund Weighted Composite Index posting a decline of -2.8 percent for the month of September, bringing losses for the quarter to -5.5 percent. The quarterly performance decline was the fourth worst in industry history, trailing only 3Q and 4Q 2008 and 3Q 1998.
Losses were widespread across industry strategies and regions, with Equity Hedge and Emerging Markets posting the steepest declines. The HFRI Equity Hedge Index fell by -4.9 percent in September, ending the quarter with a decline of -9.6 percent with negative contributions from most sub-strategies; the HFRI EH: Energy/Basic Materials Index posted a steep decline of -9.5 percent in September, while Fundamental Growth strategies losing -6.1 percent. The lone Equity Hedge sub-strategy to post a gain in September was dedicated Short Bias funds, which gained +6.9 percent, the fifth consecutive monthly gain.
Emerging Markets funds posted a decline of -7.4 percent in September and over -12.1 percent in 3Q. The weakest regional areas of performance were Emerging Asia, Russia/Eastern Europe and Latin America, each of which declined by over -9.0 percent in September. Event Driven strategies also posted sharp losses for September, with the HFRI Event Driven Index declining -3.3 percent, including negative contributions from Distressed and Special Situations funds.
Losses were less pronounced across Relative Value and Macro strategies with positive contributions from US dollar strength and falling yields only partially offsetting equity, credit and commodity sensitive declines. The HFRI Relative Value Index declined by -1.2 percent, with negative contributions from sovereign fixed income and real estate focused sub-strategies. Inclusive of September losses, Relative Value has now posted a narrow decline of -0.17 percent YTD 2011. The HFRI Macro (Total) Index declined by -0.4 percent for September; despite the sharp reversal in widely held gold positions, systematic trend following sub-strategies posted a gain of +0.2 for the month, the third consecutive month of positive returns.
"Intense volatility negatively impacted nearly every area of financial markets and the hedge fund industry in September, as weakness was both pervasive and widespread," said Kenneth J. Heinz, President of HFR. "Hedge fund managers and investors continue to maintain a critical focus on risk and financial market liquidity, as well as the far reaching impacts of the ongoing European sovereign debt crisis. In the current environment, fund managers are positioning for continued volatility and opportunities created by dislocations across asset classes."
Tuesday, October 11, 2011
Losses Keep Mounting for Equity Funds in Third Quarter, Morningstar Canada Data Show
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Equity funds in Canada suffered a fifth consecutive month of overwhelmingly negative returns in September amid high volatility and bleak economic news. This led to dismal results for the third quarter of 2011 for all 23 of the Morningstar Canada Fund Indices that track equity categories, with 16 of them losing more than 10%, according to preliminary performance data released today by Morningstar Canada.
The worst-performing fund index was the one that measures the Greater China Equity category; it lost 20.5% during the quarter, with the bulk of the losses coming in September. “Chinese banks and property developers have come under significant pressure recently, and this weighed meaningfully on the funds in this small category. Regulators are creating a tighter credit environment in the country amid fears of a rise in bad loans,” said Morningstar Fund Analyst Nick Dedes.
The flight from risk has been a recurring theme during the past several months, and the biggest losers among investment funds were those that target riskier asset classes. The second-worst performer in the third quarter was the Morningstar Natural Resources Equity Fund Index with a 17.3% loss, while Emerging Markets Equity was third from the bottom with a 16.8% drop. Moreover, the four fund indices that track small- and mid-cap equity categories were also among the bottom dwellers with losses ranging from 13.9% to 15.5%. “It’s not surprising to see these more volatile asset classes rank among the worst performers in a period where equities appear to move more on the latest headline instead of individual company fundamentals. Investors have been particularly spooked by sovereign debt woes out of Europe and are taking risk off the table,” Dedes said.
Even gold funds, which had been one of the few categories to post positive returns so far this year, suffered significant losses in September as gold prices plummeted by about 10%. The Morningstar Precious Metals Equity Fund Index lost 12.1% in September, wiping out its gains from the previous two months and resulting in a 3.7% loss for the index during the quarter.
Sector-diversified domestic equity funds also suffered the bulk of their quarterly losses in September after posting relatively benign losses in August. The Morningstar Canadian Equity Fund Index lost 8.3% last month—with most of the damage occurring in the energy and materials sectors—leading to a 12.9% loss for the quarter. The Morningstar Canadian Dividend and Income Equity Fund Index fared better with a 9% quarterly loss, while Canadian Focused Equity was down 13.6% for the three-month period.
Results for foreign equity funds were slightly worse than those of their domestic counterparts. The Morningstar U.S. Equity Fund Index lost 11.2% in the third quarter, while the indices that measure the Asia Pacific Equity, Global Equity, International Equity, and European Equity categories lost 11.6%, 12.2%, 14.8%, and 16.2%, respectively. Currency effects generally favoured Canadian investors in these funds, with the Canadian dollar depreciating against the U.S. dollar, the UK pound, and most Asian currencies.
The best performer among equity fund indices, and one of only two that posted a gain in September, was Japanese Equity with a 2.8% gain in September and a 2.6% loss for the quarter. Currency movements were particularly beneficial here from a Canadian investor standpoint, as the 11.4% loss of Japan’s Nikkei 225 Index for the quarter was largely offset by the yen’s 12.8% appreciation against the loonie. “Despite intervention efforts by the Japanese government, the yen has rallied strongly against most major currencies and likely continues to receive safe-haven flows through this period of economic strain,” Dedes said.
By contrast, bond funds had strong returns last quarter as investors, somewhat predictably, flocked to the perceived safety of the asset class. “Risk aversion is currently trumping the less-than-compelling low yields in fixed-income instruments,” Dedes said. The best performer among the 43 Morningstar Canada Fund Indices was Canadian Long Term Fixed Income with a 9.8% gain, followed by Canadian Inflation-Protected Fixed Income, Canadian Fixed Income, Global Fixed Income, and Canadian Short Term Fixed Income with gains of 4.3%, 3.8%, 2.8%, and 1.7%, respectively.
For more on third-quarter fund performance, go to www.morningstar.ca.
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Equity funds in Canada suffered a fifth consecutive month of overwhelmingly negative returns in September amid high volatility and bleak economic news. This led to dismal results for the third quarter of 2011 for all 23 of the Morningstar Canada Fund Indices that track equity categories, with 16 of them losing more than 10%, according to preliminary performance data released today by Morningstar Canada.
The worst-performing fund index was the one that measures the Greater China Equity category; it lost 20.5% during the quarter, with the bulk of the losses coming in September. “Chinese banks and property developers have come under significant pressure recently, and this weighed meaningfully on the funds in this small category. Regulators are creating a tighter credit environment in the country amid fears of a rise in bad loans,” said Morningstar Fund Analyst Nick Dedes.
The flight from risk has been a recurring theme during the past several months, and the biggest losers among investment funds were those that target riskier asset classes. The second-worst performer in the third quarter was the Morningstar Natural Resources Equity Fund Index with a 17.3% loss, while Emerging Markets Equity was third from the bottom with a 16.8% drop. Moreover, the four fund indices that track small- and mid-cap equity categories were also among the bottom dwellers with losses ranging from 13.9% to 15.5%. “It’s not surprising to see these more volatile asset classes rank among the worst performers in a period where equities appear to move more on the latest headline instead of individual company fundamentals. Investors have been particularly spooked by sovereign debt woes out of Europe and are taking risk off the table,” Dedes said.
Even gold funds, which had been one of the few categories to post positive returns so far this year, suffered significant losses in September as gold prices plummeted by about 10%. The Morningstar Precious Metals Equity Fund Index lost 12.1% in September, wiping out its gains from the previous two months and resulting in a 3.7% loss for the index during the quarter.
Sector-diversified domestic equity funds also suffered the bulk of their quarterly losses in September after posting relatively benign losses in August. The Morningstar Canadian Equity Fund Index lost 8.3% last month—with most of the damage occurring in the energy and materials sectors—leading to a 12.9% loss for the quarter. The Morningstar Canadian Dividend and Income Equity Fund Index fared better with a 9% quarterly loss, while Canadian Focused Equity was down 13.6% for the three-month period.
Results for foreign equity funds were slightly worse than those of their domestic counterparts. The Morningstar U.S. Equity Fund Index lost 11.2% in the third quarter, while the indices that measure the Asia Pacific Equity, Global Equity, International Equity, and European Equity categories lost 11.6%, 12.2%, 14.8%, and 16.2%, respectively. Currency effects generally favoured Canadian investors in these funds, with the Canadian dollar depreciating against the U.S. dollar, the UK pound, and most Asian currencies.
The best performer among equity fund indices, and one of only two that posted a gain in September, was Japanese Equity with a 2.8% gain in September and a 2.6% loss for the quarter. Currency movements were particularly beneficial here from a Canadian investor standpoint, as the 11.4% loss of Japan’s Nikkei 225 Index for the quarter was largely offset by the yen’s 12.8% appreciation against the loonie. “Despite intervention efforts by the Japanese government, the yen has rallied strongly against most major currencies and likely continues to receive safe-haven flows through this period of economic strain,” Dedes said.
By contrast, bond funds had strong returns last quarter as investors, somewhat predictably, flocked to the perceived safety of the asset class. “Risk aversion is currently trumping the less-than-compelling low yields in fixed-income instruments,” Dedes said. The best performer among the 43 Morningstar Canada Fund Indices was Canadian Long Term Fixed Income with a 9.8% gain, followed by Canadian Inflation-Protected Fixed Income, Canadian Fixed Income, Global Fixed Income, and Canadian Short Term Fixed Income with gains of 4.3%, 3.8%, 2.8%, and 1.7%, respectively.
For more on third-quarter fund performance, go to www.morningstar.ca.
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The Dow Jones Credit Suisse Core Hedge Fund Index Fell 4.23% in September
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The Dow Jones Credit Suisse Core Hedge Fund Index saw less than half of the declines seen in broad equity indexes in September. Nevertheless, uncertain market conditions negatively affected all strategies.
Oliver Schupp, President of Credit Suisse Index Co., LLC, said, “The Dow Jones Credit Suisse Core Hedge Fund Index finished down -4.23% in September, bringing year-to-date performance to -7.84%. In the Event Driven space, losses mainly stemmed from relatively concentrated long equity positions related to special situations, while Global Macro managers declined following sharp reversals in precious metals, such as gold which posted its worst monthly loss since 1983. Compared to the year-to-date drop of -15.36% for the Dow Jones Global Index, hedge funds have provided some level of capital preservation to date this year, however, all strategies appear to be feeling the pain with market uncertainty at an all time high.”
The Dow Jones Credit Suisse Core Hedge Fund Index provides the benefit of daily valuations which enables investors to more accurately track the impact of market events on the hedge fund industry. September, August and year-to-date 2011 performances are available at www.hedgeindex.com.
The Dow Jones Credit Suisse Core Hedge Fund Index saw less than half of the declines seen in broad equity indexes in September. Nevertheless, uncertain market conditions negatively affected all strategies.
Oliver Schupp, President of Credit Suisse Index Co., LLC, said, “The Dow Jones Credit Suisse Core Hedge Fund Index finished down -4.23% in September, bringing year-to-date performance to -7.84%. In the Event Driven space, losses mainly stemmed from relatively concentrated long equity positions related to special situations, while Global Macro managers declined following sharp reversals in precious metals, such as gold which posted its worst monthly loss since 1983. Compared to the year-to-date drop of -15.36% for the Dow Jones Global Index, hedge funds have provided some level of capital preservation to date this year, however, all strategies appear to be feeling the pain with market uncertainty at an all time high.”
The Dow Jones Credit Suisse Core Hedge Fund Index provides the benefit of daily valuations which enables investors to more accurately track the impact of market events on the hedge fund industry. September, August and year-to-date 2011 performances are available at www.hedgeindex.com.
Hedge funds outperform global markets in August
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Turbulent conditions and declining equity markets brought with them another month of negative returns for hedge funds in September. The Eurekahedge Hedge Fund Index was down 2.30%1 for the month, though it should be noted that the MSCI World Index fell nearly 10%2 during the same period. More than one-third of all the hedge funds that have reported to the Eurekahedge database for September were in positive territory for the month.
Key highlights for September:
- Hedge funds outperformed global markets by nearly 7.7%3 in September
- Early reports indicate negative net flows to hedge funds for the first time since November 2010
- CTA/managed futures funds witness 12th consecutive month of net positive asset flow
Regional Indices
All regional mandates finished the month in negative territory as the heightened volatility, negative sentiment surrounding Greece’s sovereign debt problem and prevailing fears of another global recession, made it a difficult and unpredictable trading environment. The markets lacked clarity throughout the month in regards to the Greek situation, keeping investors away.
The US Federal Reserve’s announcement of ‘Operation Twist’, on 21st September, did little to sooth investor concerns, and global markets continued to decline further near the month end. North American and European managers were able to provide significant downside protection amid steep declines in the markets, losing 2.10% and 1.99% respectively. The S&P500 declined 7.18% during the month while the MSCI Europe Index was down 11.75%.
Japanese hedge funds witnessed the smallest losses in September, down 0.57%, while the Nikkei lost 2.85%. The Japanese market remained sensitive to global developments during the course of the month and the Nikkei dropped to its lowest point in two and a half years on September 26th, before rebounding on better news from Europe at the month end. Hedge fund managers remained guarded during the month and winning strategies were net-short market positions as well as value investments in the food sector. Managers using options and futures also reported some gains.
Strategy Indices
Following a similar pattern to the one seen in August, most strategies were loss-making in September with the exception of CTA/managed futures funds, which were flat to slightly positive. The Eurekahedge CTA/Managed Futures Hedge Fund Index was up 0.13%4 during the month, with short-term systematic traders leading the gains. Managers trading currencies, options and futures posted the highest profits while returns from commodity investing hedge funds were mixed. Long/short equity and distressed debt hedge funds witnessed the largest losses, down 4.57% and 4.62% respectively, as risk appetite remained low for most of the month. Early reports also suggest that long/short equity managers witnessed the heaviest redemptions during the month.
Eurekahedge indices are available for download from www.eurekahedge.com/indices/hedgefundindices.asp and are updated with the latest fund returns at 23:30 GMT every day. Index values and data can be downloaded for free and subscribers can download the full list of index constituents. Please contact indices@eurekahedge.com for more information.
Turbulent conditions and declining equity markets brought with them another month of negative returns for hedge funds in September. The Eurekahedge Hedge Fund Index was down 2.30%1 for the month, though it should be noted that the MSCI World Index fell nearly 10%2 during the same period. More than one-third of all the hedge funds that have reported to the Eurekahedge database for September were in positive territory for the month.
Key highlights for September:
- Hedge funds outperformed global markets by nearly 7.7%3 in September
- Early reports indicate negative net flows to hedge funds for the first time since November 2010
- CTA/managed futures funds witness 12th consecutive month of net positive asset flow
Regional Indices
All regional mandates finished the month in negative territory as the heightened volatility, negative sentiment surrounding Greece’s sovereign debt problem and prevailing fears of another global recession, made it a difficult and unpredictable trading environment. The markets lacked clarity throughout the month in regards to the Greek situation, keeping investors away.
The US Federal Reserve’s announcement of ‘Operation Twist’, on 21st September, did little to sooth investor concerns, and global markets continued to decline further near the month end. North American and European managers were able to provide significant downside protection amid steep declines in the markets, losing 2.10% and 1.99% respectively. The S&P500 declined 7.18% during the month while the MSCI Europe Index was down 11.75%.
Japanese hedge funds witnessed the smallest losses in September, down 0.57%, while the Nikkei lost 2.85%. The Japanese market remained sensitive to global developments during the course of the month and the Nikkei dropped to its lowest point in two and a half years on September 26th, before rebounding on better news from Europe at the month end. Hedge fund managers remained guarded during the month and winning strategies were net-short market positions as well as value investments in the food sector. Managers using options and futures also reported some gains.
Strategy Indices
Following a similar pattern to the one seen in August, most strategies were loss-making in September with the exception of CTA/managed futures funds, which were flat to slightly positive. The Eurekahedge CTA/Managed Futures Hedge Fund Index was up 0.13%4 during the month, with short-term systematic traders leading the gains. Managers trading currencies, options and futures posted the highest profits while returns from commodity investing hedge funds were mixed. Long/short equity and distressed debt hedge funds witnessed the largest losses, down 4.57% and 4.62% respectively, as risk appetite remained low for most of the month. Early reports also suggest that long/short equity managers witnessed the heaviest redemptions during the month.
Eurekahedge indices are available for download from www.eurekahedge.com/indices/hedgefundindices.asp and are updated with the latest fund returns at 23:30 GMT every day. Index values and data can be downloaded for free and subscribers can download the full list of index constituents. Please contact indices@eurekahedge.com for more information.
Hedge Funds Suffer Worst Quarter since Fourth Quarter 2008
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Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined –3.78% in September (-5.53% YTD), while the S&P 500 declined -7.18% (-10.04% YTD), the Dow Jones Industrial Average decreased -6.03% (-5.74% YTD), and the NASDAQ Composite Index fell -6.36% (-8.96% YTD). Treasury and high quality bonds rallied amid the volatility, as the Barclays Aggregate Bond Index advanced +0.73% (+6.67% YTD), while the Barclays High Yield Credit Bond Index fell -3.27% (-1.38% YTD).
“September was another challenging month for hedge funds, capping one the of the worst performance quarters in history, largely driven by increased European sovereign debt risks and not declining domestic equity fundamentals. In response, managers have significantly reduced gross and net exposures in line with increased volatility, resulting in abnormally high cash levels and low net exposures,” commented Charles Gradante, Co-Founder of Hennessee Group. “Managers are looking for market transparency and stabilization before getting reinvested. Consequently, their reactive cash and net exposures present relative ‘whiplash’ performance risk should there be a sharp equity rally in the fourth quarter.”
“2011 has been a challenging year for hedge funds. There is a lot of concern that 2011 might be another 2008,” commented Lee Hennessee, Managing Principal of Hennessee Group. “At this point, we do not think that is the case. Capital markets remain open, and liquidity is adequate in most markets. Corporate balance sheets are improved, and we are seeing more stock buybacks and insider buying. From a hedge fund perspective, funds are conservatively positioned with low leverage and virtually no margin, greatly reducing any chance of forced selling or liquidations.”
The Hennessee Long/Short Equity Index declined -3.77% (-5.31% YTD) in September, its fifth consecutive negative month.
Managers experienced losses as long portfolios significantly declined in value. Hedge fund managers continued to aggressively bring down gross and net exposures amid the market decline. September was the worst month for the S&P 500 since the loss of -8.20% in May 2010. Utilities were down -0.13%, the best performing sector this month. Materials were the worst performing sector, off -12.59% as commodity prices fell, followed by energy (-12.58%) and financials (-11.56%).
Hedge funds were hurt by the underperformance of small caps, as the Russell 2000 index fell -11.37% for the month (-17.80% YTD). Market correlation, which spiked to a record high of 0.84 in August, remained elevated, resulting in a challenging stock picking environment. Managers remain concerned about global growth prospects as the debt issues in Europe continue as well as deleveraging in the U.S. continues and a hard landing in emerging markets. While managers remain cautious, they are growing more optimistic on investment opportunities once the markets stabilize. Managers are looking for the release of third quarter earnings and more importantly guidance in October to provide insight into the extent of the slowdown and its impact on growth.
“Most sentiment measures are close to March 2009 lows, but not quite there. Financial markets are focused in on the sovereign debt crisis in Europe as the macro issue that must be resolved before volatility and negative sentiment will subside,” commented Charles Gradante. “Hedge funds are going to remain cautious with a lot of ‘dry powder’. Great opportunities in risk assets are created during macro crises, as we saw in 2009, and hedge fund managers are getting ready to capitalize.”
The Hennessee Arbitrage/Event Driven Index declined in September, falling –3.15% (-3.90% YTD) as risk assets declined and spreads widened.
For the month, high-yield bonds declined -3.3%, underperforming safe haven products, such as investment grade bonds (-0.2%) and 10 year Treasuries (+2.8%).
High yield bond and loan spreads widened 108 basis points and 2 basis points to 834 basis points and 795 basis points, respectively, their highest level since September 2009.
The Hennessee Distressed Index decreased -6.31% in September (-7.82% YTD).
Distressed managers continue to suffer losses due to declining equity markets, greater concentration, and reduced liquidity.
Default volume increased in September, as $4.0 billion in high-yield bonds and institutional loans defaulted.
The Hennessee Merger Arbitrage Index declined –2.03% in September (-1.56% YTD).
Merger spreads widened in September.
While M&A volume has slowed in recent months, there have been several attractive deals.
Managers invested in the recently announced Motorola Mobility, Petrohawk and Goodrich deals.
Given the investment environment, managers have become more selective in deal selection, focusing mostly on strategic deals, which are offering annualized spreads in the 8% to 10% range.
Once the European debt issues are resolved, managers expect deal activity to pick up.
The Hennessee Convertible Arbitrage Index returned -2.93% (-2.18% YTD) in September.
Managers report that convertibles performed reasonably well, but cheapen along with other risk assets in September.
Managers are encouraged as they see no signs of “gapping bids” to the downside or forced selling that convertibles faced in 2008.
Owners of convertibles remain diversified with a large number of traditional outright buyers as well as hedge funds with low leverage.
Supply remains constrained with essentially no new issuance over the last two months.
“Managers fear that the current Chinese currency policy is hurting the global recovery. China's currency by all measures is undervalued, which is curtailing the country’s imports,” commented Charles Gradante. “We are in the midst of a global rebalancing, but China is not participating in that rebalancing. China is reluctant to let the Yuan appreciate, as it should, in order increase domestic consumption of imports from developed counties and reduce trade deficits in the U.S. and EU.”
The Hennessee Global/Macro Index declined -4.25% in September (-7.49% YTD). International managers experienced losses as global markets continued to plummet amid concerns about a slowdown in global growth, the European sovereign debt crisis and a potential hard landing in China. Financial markets across the globe declined with the MSCI All-Country World Index falling -8.85% in September (-13.75% YTD), its worst month since October 2008. Europe (-11.11%) was again hit especially hard, while Japan was on the best performing countries, down only -2.07% for the month. International hedge fund managers outperformed, as the Hennessee International Index declined -2.88% (-6.44% YTD). Managers benefited from reduced gross and net exposure levels. Emerging markets underperformed developed markets due increased risk aversion and concerns about Chinese growth. The MSCI EM Index declined -14.78% (-23.53% YTD). Hedge fund managers outperformed on a relative basis, as the Hennessee Emerging Markets Index fell -7.61% (-11.75% YTD). The Hennessee Macro Index was down -1.26% in September (-1.09% YTD). There were several macro themes that made significant moves in September. Managers long the U.S. dollar experienced gains as it rose +6% in September, its biggest monthly increase since October 2008. Managers experienced losses long the Swiss Franc and Japanese Yen, viewed as safe havens, as Switzerland and Japan intervened to stem gains in their currencies. Managers suffered losses as the commodities were down across the board. The Standard & Poor’s GSCI Total Return Index declined -12% in September. Managers also experienced losses long commodity-related currencies as they declined in value. Gold lost its appeal as a safe haven, and prices corrected sharply in September, falling -11%. In fixed income markets, managers experienced gains long U.S. Treasuries and German bunds as yields continued to fall. “Operation Twist” was initiated by the Fed, leading to a 30 to 69 basis point rally in the 10 and 30 year US Treasury yields, respectively.
* For a more in depth monthly review of the economy, capital markets, and hedge fund performance and strategies, the Hennessee Group offers the monthly Hennessee Hedge Fund Review.
Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined –3.78% in September (-5.53% YTD), while the S&P 500 declined -7.18% (-10.04% YTD), the Dow Jones Industrial Average decreased -6.03% (-5.74% YTD), and the NASDAQ Composite Index fell -6.36% (-8.96% YTD). Treasury and high quality bonds rallied amid the volatility, as the Barclays Aggregate Bond Index advanced +0.73% (+6.67% YTD), while the Barclays High Yield Credit Bond Index fell -3.27% (-1.38% YTD).
“September was another challenging month for hedge funds, capping one the of the worst performance quarters in history, largely driven by increased European sovereign debt risks and not declining domestic equity fundamentals. In response, managers have significantly reduced gross and net exposures in line with increased volatility, resulting in abnormally high cash levels and low net exposures,” commented Charles Gradante, Co-Founder of Hennessee Group. “Managers are looking for market transparency and stabilization before getting reinvested. Consequently, their reactive cash and net exposures present relative ‘whiplash’ performance risk should there be a sharp equity rally in the fourth quarter.”
“2011 has been a challenging year for hedge funds. There is a lot of concern that 2011 might be another 2008,” commented Lee Hennessee, Managing Principal of Hennessee Group. “At this point, we do not think that is the case. Capital markets remain open, and liquidity is adequate in most markets. Corporate balance sheets are improved, and we are seeing more stock buybacks and insider buying. From a hedge fund perspective, funds are conservatively positioned with low leverage and virtually no margin, greatly reducing any chance of forced selling or liquidations.”
The Hennessee Long/Short Equity Index declined -3.77% (-5.31% YTD) in September, its fifth consecutive negative month.
Managers experienced losses as long portfolios significantly declined in value. Hedge fund managers continued to aggressively bring down gross and net exposures amid the market decline. September was the worst month for the S&P 500 since the loss of -8.20% in May 2010. Utilities were down -0.13%, the best performing sector this month. Materials were the worst performing sector, off -12.59% as commodity prices fell, followed by energy (-12.58%) and financials (-11.56%).
Hedge funds were hurt by the underperformance of small caps, as the Russell 2000 index fell -11.37% for the month (-17.80% YTD). Market correlation, which spiked to a record high of 0.84 in August, remained elevated, resulting in a challenging stock picking environment. Managers remain concerned about global growth prospects as the debt issues in Europe continue as well as deleveraging in the U.S. continues and a hard landing in emerging markets. While managers remain cautious, they are growing more optimistic on investment opportunities once the markets stabilize. Managers are looking for the release of third quarter earnings and more importantly guidance in October to provide insight into the extent of the slowdown and its impact on growth.
“Most sentiment measures are close to March 2009 lows, but not quite there. Financial markets are focused in on the sovereign debt crisis in Europe as the macro issue that must be resolved before volatility and negative sentiment will subside,” commented Charles Gradante. “Hedge funds are going to remain cautious with a lot of ‘dry powder’. Great opportunities in risk assets are created during macro crises, as we saw in 2009, and hedge fund managers are getting ready to capitalize.”
The Hennessee Arbitrage/Event Driven Index declined in September, falling –3.15% (-3.90% YTD) as risk assets declined and spreads widened.
For the month, high-yield bonds declined -3.3%, underperforming safe haven products, such as investment grade bonds (-0.2%) and 10 year Treasuries (+2.8%).
High yield bond and loan spreads widened 108 basis points and 2 basis points to 834 basis points and 795 basis points, respectively, their highest level since September 2009.
The Hennessee Distressed Index decreased -6.31% in September (-7.82% YTD).
Distressed managers continue to suffer losses due to declining equity markets, greater concentration, and reduced liquidity.
Default volume increased in September, as $4.0 billion in high-yield bonds and institutional loans defaulted.
The Hennessee Merger Arbitrage Index declined –2.03% in September (-1.56% YTD).
Merger spreads widened in September.
While M&A volume has slowed in recent months, there have been several attractive deals.
Managers invested in the recently announced Motorola Mobility, Petrohawk and Goodrich deals.
Given the investment environment, managers have become more selective in deal selection, focusing mostly on strategic deals, which are offering annualized spreads in the 8% to 10% range.
Once the European debt issues are resolved, managers expect deal activity to pick up.
The Hennessee Convertible Arbitrage Index returned -2.93% (-2.18% YTD) in September.
Managers report that convertibles performed reasonably well, but cheapen along with other risk assets in September.
Managers are encouraged as they see no signs of “gapping bids” to the downside or forced selling that convertibles faced in 2008.
Owners of convertibles remain diversified with a large number of traditional outright buyers as well as hedge funds with low leverage.
Supply remains constrained with essentially no new issuance over the last two months.
“Managers fear that the current Chinese currency policy is hurting the global recovery. China's currency by all measures is undervalued, which is curtailing the country’s imports,” commented Charles Gradante. “We are in the midst of a global rebalancing, but China is not participating in that rebalancing. China is reluctant to let the Yuan appreciate, as it should, in order increase domestic consumption of imports from developed counties and reduce trade deficits in the U.S. and EU.”
The Hennessee Global/Macro Index declined -4.25% in September (-7.49% YTD). International managers experienced losses as global markets continued to plummet amid concerns about a slowdown in global growth, the European sovereign debt crisis and a potential hard landing in China. Financial markets across the globe declined with the MSCI All-Country World Index falling -8.85% in September (-13.75% YTD), its worst month since October 2008. Europe (-11.11%) was again hit especially hard, while Japan was on the best performing countries, down only -2.07% for the month. International hedge fund managers outperformed, as the Hennessee International Index declined -2.88% (-6.44% YTD). Managers benefited from reduced gross and net exposure levels. Emerging markets underperformed developed markets due increased risk aversion and concerns about Chinese growth. The MSCI EM Index declined -14.78% (-23.53% YTD). Hedge fund managers outperformed on a relative basis, as the Hennessee Emerging Markets Index fell -7.61% (-11.75% YTD). The Hennessee Macro Index was down -1.26% in September (-1.09% YTD). There were several macro themes that made significant moves in September. Managers long the U.S. dollar experienced gains as it rose +6% in September, its biggest monthly increase since October 2008. Managers experienced losses long the Swiss Franc and Japanese Yen, viewed as safe havens, as Switzerland and Japan intervened to stem gains in their currencies. Managers suffered losses as the commodities were down across the board. The Standard & Poor’s GSCI Total Return Index declined -12% in September. Managers also experienced losses long commodity-related currencies as they declined in value. Gold lost its appeal as a safe haven, and prices corrected sharply in September, falling -11%. In fixed income markets, managers experienced gains long U.S. Treasuries and German bunds as yields continued to fall. “Operation Twist” was initiated by the Fed, leading to a 30 to 69 basis point rally in the 10 and 30 year US Treasury yields, respectively.
* For a more in depth monthly review of the economy, capital markets, and hedge fund performance and strategies, the Hennessee Group offers the monthly Hennessee Hedge Fund Review.
Hedge Funds Pull in $6.1 Billion in August, Seventh Inflow in Eight Months
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Fixed Income Hedge Funds Boast Best Returns and Heaviest Inflows.
Hedge Fund Managers Extremely Bearish on S&P 500 and Very Bullish on U.S. Dollar Index. Managers Shift to Bullish from Bearish on 10-Year Treasury.
Hedge funds pulled in $6.1 billion in August, the seventh inflow in eight months, report BarclayHedge and TrimTabs Investment Research. Hedge funds hauled in a heavy $51.0 billion in the first eight months of 2011.
“Recent inflows might owe in part to excellent relative performance,” says Sol Waksman, founder and President of BarclayHedge. “While the S&P 500 plunged 10.6% in the four months ended August, the Barclay Hedge Fund Index decreased only 5.6%. Additionally, our preliminary data for September reveals that hedge funds outperformed the S&P 500 by more than a 2:1 margin again last month.”
Fixed income hedge funds are wildly popular. These funds posted an inflow in 13 of the past 14 months and have raked in $14.6 billion in 2011, the heaviest inflow of all hedge fund strategies. Fixed income hedge funds have also returned 3.6% in 2011, the best performance of all strategies.
“Prices have been soaring in many segments of the fixed income space,” notes Leon Mirochnik, Associate Portfolio Manager at TrimTabs. “The flow data we track daily shows that TIPS ETFs sport a handsome year-to-date return of 10.4%. Even lowly muni ETFs, which are up 7.0% in 2011, have crushed stocks. Additionally, the yield on the 10-year Treasury recently plunged to 1.72%, the lowest level on record, from 3.75% in February.”
The latest TrimTabs/BarclayHedge Survey of Hedge Fund Managers shows that managers have reversed their stance on long-dated Treasuries. Bullish sentiment on the 10-year note rose to 23% in September from 15% in August, while bearish sentiment sank to 16% from 32%. Meanwhile, managers are extremely sour on domestic equities. Bearish sentiment on the S&P 500 soared to 57% from 42%, while bullish sentiment plunged to 16% from 27%. Additionally, managers are very upbeat on the U.S. Dollar Index (59% bulls against 9% bears).
“Hedge fund managers have zero interest in risk at present,” notes Mirochnik. “They are clinging to the safety of Treasuries and the greenback and stiff-arming stocks. Nevertheless, hedge fund investors are forking over fresh cash, and managers must put it to work. This money could support equities in the final quarter of 2011, especially if hedge fund managers lever up in an attempt to end the year with a bang.”
The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis. The TrimTabs/BarclayHedge Hedge Fund Flow Report provides detailed analysis of these flows as well as relevant topical studies. Click here for further information.
Fixed Income Hedge Funds Boast Best Returns and Heaviest Inflows.
Hedge Fund Managers Extremely Bearish on S&P 500 and Very Bullish on U.S. Dollar Index. Managers Shift to Bullish from Bearish on 10-Year Treasury.
Hedge funds pulled in $6.1 billion in August, the seventh inflow in eight months, report BarclayHedge and TrimTabs Investment Research. Hedge funds hauled in a heavy $51.0 billion in the first eight months of 2011.
“Recent inflows might owe in part to excellent relative performance,” says Sol Waksman, founder and President of BarclayHedge. “While the S&P 500 plunged 10.6% in the four months ended August, the Barclay Hedge Fund Index decreased only 5.6%. Additionally, our preliminary data for September reveals that hedge funds outperformed the S&P 500 by more than a 2:1 margin again last month.”
Fixed income hedge funds are wildly popular. These funds posted an inflow in 13 of the past 14 months and have raked in $14.6 billion in 2011, the heaviest inflow of all hedge fund strategies. Fixed income hedge funds have also returned 3.6% in 2011, the best performance of all strategies.
“Prices have been soaring in many segments of the fixed income space,” notes Leon Mirochnik, Associate Portfolio Manager at TrimTabs. “The flow data we track daily shows that TIPS ETFs sport a handsome year-to-date return of 10.4%. Even lowly muni ETFs, which are up 7.0% in 2011, have crushed stocks. Additionally, the yield on the 10-year Treasury recently plunged to 1.72%, the lowest level on record, from 3.75% in February.”
The latest TrimTabs/BarclayHedge Survey of Hedge Fund Managers shows that managers have reversed their stance on long-dated Treasuries. Bullish sentiment on the 10-year note rose to 23% in September from 15% in August, while bearish sentiment sank to 16% from 32%. Meanwhile, managers are extremely sour on domestic equities. Bearish sentiment on the S&P 500 soared to 57% from 42%, while bullish sentiment plunged to 16% from 27%. Additionally, managers are very upbeat on the U.S. Dollar Index (59% bulls against 9% bears).
“Hedge fund managers have zero interest in risk at present,” notes Mirochnik. “They are clinging to the safety of Treasuries and the greenback and stiff-arming stocks. Nevertheless, hedge fund investors are forking over fresh cash, and managers must put it to work. This money could support equities in the final quarter of 2011, especially if hedge fund managers lever up in an attempt to end the year with a bang.”
The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis. The TrimTabs/BarclayHedge Hedge Fund Flow Report provides detailed analysis of these flows as well as relevant topical studies. Click here for further information.
HFN Regional Focus Report: Developed Europe
HFN has published a new report on hedge funds investing in developed European markets. In the midst of the sovereign crisis in the Eurozone, funds investing in developed Europe have performed relatively well in 2011, -4.67% vs. -13.92% of the Stoxx Europe 600, however most lag the aggregate hedge fund industry. Investor interest in developed and broad Europe focused funds has been below average. Funds have had an estimated net outflow of $1.8 billion in 2011, or 1.0% of total AUM vs. 2.8% growth for the hedge fund industry. The full report will look at the sub-groups of funds investing in the region to see if outperformance of regional equity markets appears to be tactical or if it is more a factor of breadth of strategies and smoothed aggregate performance.
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