Hennessee Group LLC announced today that the Hennessee Hedge Fund Index advanced +1.79% in May (+7.00% YTD), while the S&P 500 advanced +2.08% (+14.34% YTD), the Dow Jones Industrial Average increased +1.86% (+15.35% YTD), and the NASDAQ Composite Index climbed +3.82% (+14.45% YTD). Bonds fell, as the Barclays Aggregate Bond Index declined -1.78% (-0.91% YTD).
“Managers reported at month end that it appears that economic data is finally starting to matter to the broad markets in the U.S. and globally as the progressively worse data of the previous three weeks in May were generally ignored with the month ending on a sour note that everyone heard,” commented Charles Gradante, Co-Founder of Hennessee Group. “At month end, managers saw significant increases in volatility, a significant drop in the dollar, especially against the Japanese Yen, the Japanese market experienced a major pull back which were compounded by global GDP, employment, housing, and consumer spending disappointments.”
“Hedge fund managers posted positive performance despite a pickup in volatility,” said Lee Hennessee, Managing Principal of Hennessee Group. “For the year, managers have generated positive performance, capturing a portion of the market rally while remaining cautious about the potential for a market pullback.”
Equity long/short hedge funds were positive in May, as the Hennessee Long/Short Equity Index advanced +2.71% (+8.57% YTD). In the U.S., concerns regarding the tapering of the U.S. Federal Reserve’s asset purchase program caused increased volatility towards the end of the month and led the U.S. markets to sell-off from record highs. Hedge fund managers were able to generate gains during the beginning of the month and protect against losses during periods of volatility. The best performing sectors were financials (+5.88%), industrials (+4.62%), and technology (+4.23%). The worst performing sectors were utilities (-9.58%), telecommunication services (-7.44%) and consumer staples (-2.39%). Managers continue to generate gains on their long portfolios, while shorting remains challenging.
“Economic data remains in ‘goldilocks’ zone, weak enough to justify continued stimulus but strong enough to keep expectations positive,” stated Charles Gradante.
The Hennessee Arbitrage/Event Driven Index advanced +1.36% in May (+6.04% YTD). During the second half of the month, concerns about a tapering off of quantitative easing in the U.S. resulted in an increase in treasury yields and caused an increase in volatility of the financial markets. The Barclays Aggregate Bond Index declined -1.78% (-0.91% YTD). Yields on Treasuries were up, with the 10 Year Treasury yield increasing from 1.70% to 2.13%. The Merrill Lynch High Yield Master II Index declined -0.53% (+4.25% YTD). High yield spreads declined 1 basis point to 454 basis points over treasuries. The Hennessee Distressed Index increased +1.23% in May (+7.13% YTD). Distressed portfolios benefited from position specific catalysts and the broad market rally. The Hennessee Merger Arbitrage Index advanced +0.14% in May (+4.00% YTD). Managers posted modest positive gains as M&A activity continued. The Hennessee Convertible Arbitrage Index returned +1.52% in May (+3.19% YTD). Despite the sell-off in the U.S. Treasury market, convertible bond valuations in the U.S. strengthened.
“International managers speculated that ECB inflation and unemployment data for May will force ECB to further debase the Euro through monetary expansion making sovereign debt the best play.” commented Charles Gradante. “However, managers have increased concerns about the EUs ability to grow out of their problems as job creation is a socialized economy remains an enigma at this time.”
The Hennessee Global/Macro Index advanced +0.26% in May (+5.34% YTD). The MSCI EAFE Index fell -2.93% (+6.12% YTD). The Hennessee International Index declined -0.797% (+6.45%). Emerging markets were also down, as the MSCI Emerging Market Index decline -2.94% (-4.39% YTD). Emerging market hedge funds also struggled relative to developed market counterparts, as the Hennessee Emerging Market Index advanced +0.13% (+3.26% YTD). The Hennessee Macro Index fell -1.13% for the month (+1.16%). The month was dominated by a sharp reversal in Japanese equities, which hurt many macro managers. In addition, macro managers were hurt by a sharp rise in bond yields globally. Managers also experienced losses in currencies as the Yen strengthened against the dollar and emerging market currencies declined. The Dow Jones-UBS Commodity Index also declined, losing -2.24% (-6.04% YTD).