Hedge Funds Lag Equity Markets in Macro Driven Market

July 12th, 2012
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Contributed by: Company Press Release
Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index increased +0.06% in June (+2.10% YTD), while the S&P 500 gained +3.96% (+8.66% YTD), the Dow Jones Industrial Average advanced +3.93% (+5.42% YTD), and the NASDAQ Composite Index increased +3.81% (+12.66%). Bonds were also up, as the Barclays Aggregate Bond Index increased +0.04% (+2.37% YTD) and the Barclays High Yield Credit Bond Index increased +2.11% (+7.26%).

“It looked like June was going to be another poor month for risk assets until the last trading day of the month. The agreement from European Union leaders towards a future banking union resulted in a short-covering rally,” commented Charles Gradante, Managing Principal of Hennessee Group. “The markets continue to be macro driven. Trading volume is down, volatility is up, correlation is high, and macro events are driving price swings. It remains a challenging environment for security selection. Most managers are not trying to time the market, as it is difficult to do consistently. Most are conservative, trying to generate alpha in specific opportunities.”

“Hedge funds lagged in June as traditional benchmarks posted strong positive performance. The majority of gains came at the end of the month as investor sentiment improved on the hope for stability in Europe. Hedge funds did not participate in the rally due to conservative exposures and suffered losses due to short covering. ” said Lee Hennessee, Managing Principal of Hennessee Group. “For the year, hedge funds are underperforming traditional equity benchmarks.”

Equity long/short managers posted modest positive performance, as the Hennessee Long/Short Equity Index advanced +0.63% (+2.58% YTD). After a relatively calm start to the year, the Dow posted twenty-two days of triple-digit moves during the second quarter, compared with just six in the first quarter. Equity market volatility continued in June as the S&P 500 ended the month with a gain of nearly 2.5%, bringing the monthly return to +4%. Hedge fund managers started June with conservative exposures after the sharp selloff in May. As a result, hedge funds failed to participate in the market rally. Looking to July, managers expect volatility to continue as we enter second quarter reporting season, but are optimistic as earnings releases should lead to more dispersion among securities. Managers are seeing opportunities as equity valuations appear cheap. The S&P 500 is trading at a price-to-earnings multiple of less than 13. Although expectations for earnings have come down, many remain bullish on corporate profits. However, there are plenty of longer term concerns. While Europe remains a worry for markets, focus seems to have shifted to the U.S., where investors are concerned about whether a political stalemate will dictate performance during the second half of the year. With government policy affecting financial markets, investors are nervous about the November elections and the year-end “fiscal cliff” of tax cuts and economic stimulus that could drive the U.S. economy into recession.

“Some pundits are saying that a ‘perfect storm’ is developing due to stalled growth in the United States, the European debt crisis, a slowdown in China, and military conflict in Iran,” commented Charles Gradante. “But many managers are taking a contrarian point of view, stating that this scenario is already built into stock prices. By any measure, stocks are cheap. The S&P 500 is currently trading at a price-to-earnings (PE) ratio of 12.8. Stocks in the United Kingdom and France now are trading at only 9.5 times 2012 earnings, the lowest in 30 years. With more than 60% of corporate sales from European firms originating internationally, investing in Europe may be around the corner.”

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Related Article Tags: Multi-Strategy, Long Short, Equity, Debt and Global Macro Hedge Fund News; Hedge Fund Resources and Featured Partner News


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