Hedge funds declined 0.38% in April

Date: Thursday, May 10, 2012
Author: Wendy Chothia, HedgeWeek

The Hennessee Hedge Fund Index declined 0.38% in April (+4.02% YTD), while the S&P 500 fell 0.75% (+11.16% YTD), the Dow Jones Industrial Average increased 0.01% (+8.16% YTD), and the NASDAQ Composite Index declined 1.46% (+16.94%). 

Bonds rallied, as the Barclays Aggregate Bond Index increased 1.11% (+1.42% YTD) and the Barclays High Yield Credit Bond Index advanced 1.05% (+6.44%).
 
“Hedge funds declined in April, along with equity markets, due to renewed concerns that the European sovereign-debt crisis would worsen and global economic growth would slow,”says Charles Gradante (pictured), Managing Principal of Hennessee Group. “After a strong rally in the first quarter, hedge fund managers were positioned cautiously with lower net and gross exposures.  However, managers still suffered losses as volatility spiked and correlations among securities increased regardless of fundamentals.”
 
“After a strong first quarter, investor risk appetite has started to wane.  Managers have shifted their focus back to the Eurozone where they are concerned about the combination of economic recession and sovereign debt issues,” says Lee Hennessee, Managing Principal of Hennessee Group. “In addition, there are concerns about the European elections.  Those elected will attempt to reduce austerity and stop the cuts in government spending, which will add additional uncertainty and complexity to fiscal issues.” 
 
Equity long/short posted losses in April, as the Hennessee Long/Short Equity Index declined 0.61% (+3.88% YTD).  Equity markets also declined, with the S&P 500 ending the month down 0.75%. Performance was mixed across sectors, with energy and cyclicals posting advances while financials and technology posted declines.  Equity markets had been down significantly more, but pared losses with four straight days of gains at month end.  Economic data in April suggested the economy may slow in the summer months and caused the market to pull back from the four-year high reached in early April.  Worries about Europe’s debt troubles and concerns about US economic growth brought the return of the “risk on, risk off” trade. 

Volatility picked up in April, with six triple-digit moves in the Dow Jones Industrial Average.  Correlation between individual stocks rose to 0.38 from 0.12 in early February.  Implied correlation is now at 0.48, up 20% in the past month and near levels seen in the middle of 2011. Managers are cautiously optimistic as valuation gaps between long and short opportunities are significant. However, there are many macro concerns and most expect politics and fiscal issues to result in greater volatility for the rest of the year. Both gross and net exposures have declined due to the combination of profit taking after a strong first quarter rally and increased caution going into summer.
 
“Investors should start to focus on the US political situation,” says Gradante. “The economy faces a ‘Fiscal Cliff’ next year.  At the beginning of 2013, the Bush tax cuts and payroll tax reduction are set to expire.  In addition, there are mandated spending cuts that become effective as a result of the debt ceiling negotiation last year. If these policies are not extended, they have the potential to subtract 3% from GDP.  To make matters worse, it also looks like they will have to re-address the US debt ceiling as early as this summer.” 
 
The Hennessee Arbitrage/Event Driven Index declined 0.04% (+4.67% YTD) in April.  Risk assets were generally weaker in April with credit and equity markets recovering towards the end of the month.  Bonds rallied, as the Barclays Aggregate Bond Index increased 1.11% (+1.42% YTD) and the Barclays High Yield Credit Bond Index advanced 1.05% (+6.44%).  

Treasuries posted strong gains as the yield on the 10 year declined from 2.23% to 1.95%. High yield bonds also performed well, but the spread over Treasuries widened 5 basis points from 5.99% to 6.05%. The Hennessee Distressed Index fell 1.02% in April (+4.44% YTD).  The flight to quality resulted in losses for several core distressed positions in April.  The Hennessee Merger Arbitrage Index decreased 0.28% in April (+2.73% YTD).  Managers posted small losses as deal spreads widened amid heighted volatility. The Hennessee Convertible Arbitrage Index returned +0.20% (+4.89% YTD).  The Merrill Lynch Convertible Index registered a small cheapening but valuations were stable, outperforming other risk assess.  Tighter spreads and equity hedges drove gains.  New issuance was respectable, amounting to USD3.4 billion globally. 
 
“While gold prices have been stuck in a trading range, many managers remain bullish for the long term. The US dollar has maintained its strength as Europe continues to struggle, which has put pressure on gold prices,” says Gradante. “However, central banks, including China and other emerging economies, have increased their purchases of gold substantially in recent months.  There is significant new demand which is not being reflected in gold prices yet.” 
 
The Hennessee Global/Macro Index declined 0.41% (+3.69% YTD) in April.  Global equities experienced losses, as the MSCI All-Country World Index fell 1.1% in April.  International hedge fund managers posted losses, as the Hennessee International Index fell 0.51% (+4.97% YTD).  Emerging market also declined in April with the MSCI Emerging Markets Index falling 1.42% (+13.65%).  Hedge fund managers experienced losses in equities and currencies, as the Hennessee Emerging Market Index declined 0.75% (+4.16% YTD).  Gains in China were offset by losses in Latin America and emerging Europe.  Macro managers were up modestly in April, as the Hennessee Macro Index advanced 0.10% (+0.68% YTD).  Macro strategies continue to struggle as managers experience difficulty taking advantage of trends.  Long positions in the Euro-Bund and 10-year US Treasury Note were significant contributors to positive performance.  US yields declined sharply with the yield on the two-year falling six basis points from 0.33% to 0.27% and the yield on the 10-year Treasury falling 28 basis points from 2.23% to 1.95%.  The US dollar declined against the Japanese Yen and British Pound, but strengthened against the Euro. Commodities were mixed, with the Dow Jones-UBS Commodity Index falling 0.43% for the month of April.  Gold prices fell slightly as the dollar strengthened.