Hennessee: Hedge Funds Protect Capital as Markets Decline

Date: Thursday, August 11, 2011
Author: Alex Akesson, HedgeCo.Net

New York (HedgeCo.net) – The Hennessee Hedge Fund Index has declined -0.25% in July (+1.41% YTD), while the S&P 500 declined -2.15% (+2.75% YTD), the Dow Jones Industrial Average fell -2.18% (+4.89% YTD), and the NASDAQ Composite Index decreased -0.62% (+3.90% YTD).

Some of the Index highlights include:

• The S&P 500 ended July down -2.15% due to the political debate around the U.S. debt issue.
• The only sectors positive for the month were information technology (+1.57%) and energy (+0.64%).
• Hedge fund managers were up modestly, (+0.44% ), benefiting from positive contributions from Asia, Russia and other emerging markets
• In an effort to reduce risk, investors are piling into government bonds and selling risk assets
• Emerging markets outperformed their developed counterparts
• Fund Managers generated gains in fixed income, short the U.S. dollar, and long commodities, including precious metals, oil and agricultural commodities. Every major S&P GSCI commodity sector increased in July.
• Silver was the best performing commodity in July, up +13.2%. Gold ended the month at a new high, closing at $1,629, as investors sought to avoid paper currency.

“With defensive positioning and low exposures, hedge funds were able to protect capital as the equity markets sold off in July amid concerns about economic growth and the political impasse around the U.S. debt ceiling,” Charles Gradante, Co-Founder of Hennessee Group, said.

Bonds rallied amid the volatility, as the Barclays Aggregate Bond Index advanced +1.59% (+4.37% YTD) and the Barclays High Yield Credit Bond Index advanced +1.16% (+6.20% YTD).

“It has been a challenging year with several episodes where hedge funds had the potential to be ‘whipsawed’ by sharp reversals between risk-on and risk off periods,” Lee Hennessee, Managing Principal of Hennessee Group continued. “For the year, hedge funds are modestly positive, underperforming most traditional benchmarks. Hedge funds have been willing to sacrifice upside participation in order to be more cautious and defensively positioned. This will hopefully benefit managers in August as the markets are experiencing a sharp and painful correction in risk assets.”

Q3 and Q4 estimates are still expected to be record highs, managers are a bit concerned that expectations are too high. However, despite these positive developments, managers are cautious and have been reducing exposures over in recent months due to the macro headwinds and increased volatility.