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Emerging Markets Drag Hedge Fund Portfolios Down

Hennessee Group LLC announced today that the Hennessee Hedge Fund Index decreased -0.18% in January (-0.18% YTD), while the S&P 500 dropped -3.56% (-3.56% YTD), the Dow Jones Industrial Average fell -5.30% (-5.30% YTD), and the NASDAQ Composite Index dipped -1.74% (-1.74% YTD). Bonds were positive on the month, as the Barclays Aggregate Bond Index gained +1.48% (+1.48% YTD).

“While both the long/short equity index and arbitrage/event driven index successfully avoided the -3.56% decline in the equity markets (+0.83% and +0.58%, respectively), the global/macro index was down -2.27% resulting in the overall decline in the Hennessee Hedge Fund Index of -0.18%.” commented Charles Gradante, Co-Founder of Hennessee Group LLC. “Chairwoman Janet Yellen is on a rocket ship with no windows as tapering in the U.S. led to widening credit spreads and rising interest rates in emerging markets which spooked global equity markets causing a flight to safety as emerging markets and their currencies became less attractive.”

Equity long/short hedge funds were positive in January, as the Hennessee Long/Short Equity Index gained +0.83% (+0.83% YTD). The best performing sectors were utilities (+2.88%), health care (+0.87%), and information technology (-2.59%), while underperforming sectors were energy (-6.33%), consumer discretionary (-5.97%) and consumer staples (-5.30%). Risk assets reversed course in January as volatility, measured by the VIX, rose to levels not seen since October 2013 when the U.S. Federal government briefly shut down. Equity markets in particular suffered a weak start to 2014 across the board, however, hedge funds managed to weather the volatility quite well.

“One manager agreed with Larry Kudlow of CNBC stating that, ‘Larry Kudlow has it right, this bull market is intact. There is no competition for equities. Bull markets don’t die of old age. Bull markets end with a recession, excessive valuations or a fat tail event.” reported Charles Gradante.

The Hennessee Arbitrage/Event Driven Index rose +0.58% in January (+0.58% YTD). The Barclays Aggregate Bond Index gained +1.48% (+1.48% YTD) as interest rates dropped in January. High yield increased as the Merrill Lynch High Yield Master II Index increased +0.74% in January (+0.74% YTD). High yield spreads increased rather modestly, rising 21 basis points to end the month 421 basis points over treasuries. The Hennessee Distressed Index climbed +1.01% in January (+1.01% YTD) due to strong performance from restructurings in the consumer, communications and basic materials sectors and on the heels of a relatively strong 2013. The Hennessee Merger Arbitrage Index gained +0.55% in January (+0.55% YTD) as there were several favorable deals including Suntory’s announced $16 billion acquisition of Beam Inc. The Hennessee Convertible Arbitrage Index jumped +2.54% in January (+2.54% YTD).

The Hennessee Global/Macro Index lost -2.27% in January (-2.27% YTD). The Dow Jones UBS Commodity Index reversed course and gained +1.23% (-9.58% YTD), while the MSCI ACWI Index lost -4.07% (-4.07% YTD) and the MSCI EAFE Index dropped -4.07% (-4.07% YTD). The Hennessee International Index fell -3.69% (-3.69%). Gains in Denmark, Ireland, Israel and New Zealand were offset by weakness in Finland, Norway, Belgium and Canada. Emerging markets were mostly negative for December, as the MSCI Emerging Market Index sunk -6.60% (-6.60% YTD), while, the Hennessee Emerging Market Index slipped -1.48% (-1.48% YTD). Emerging markets continued to underperform developed markets as investors continue to see considerable growth and inflation risks in these markets. While hedge funds have significantly the long-only benchmarks, many investors continue to favor developed markets over emerging markets. The Hennessee Macro Index decreased -1.77% for the month of January (-1.77% YTD).

Fixed income managers were modestly positive in January as bond yields dropped for the month with the 10-Year U.S. Treasury ending the month at 2.67%, down from 3.04% in December. Commodities were mixed for the month, with gold rising +3.57% and silver dropping -1.44% for the month. The U.S. Dollar gained against major currencies, rising +1.14% versus the Euro, +1.38% versus the Australian Dollar, +4.52% versus the Canadian Dollar while losing -2.64% versus the Japanese Yen. Crude oil fell for the month with WTI dropping -0.94% while natural gas jumped +16.86% for the month.

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