West Palm Beach (HedgeCo.net) – “Hennessee Group research and discussions with hedge fund managers has lead us to believe that the 20 year secular bull market in bonds is over.” Charles Gradante, Co-Founder of hedge fund investor consultant, Hennessee Group LLC, said of the 9 year high point seen this month in hedge funds.

“We see a problem growing in the bond market. The Government is issuing more debt than it is buying back. This has to lead to rates increasing and equity PE ratios adjusting downward. Our contacts among hedge fund managers continue to buy gold and short Treasuries. However, Hennessee Group expects the Treasury and Fed to put a short squeeze on at an opportune time.”

The Hennessee Hedge Fund Index advanced +5.68% in May (+11.40% YTD), while the S&P 500 increased +5.31% (+1.76% YTD), the Dow Jones Industrial Average advanced +4.07% (-3.14% YTD), and the NASDAQ Composite Index advanced +3.32% (+12.52% YTD). Bonds also rose, as the Barclays Aggregate Bond Index advanced +0.73% (+1.33% YTD).

Managers have been maintaining a conservative investment strategy, which has caused them to lag in the recent market rally. In May, funds also benefited from long positions in energy and commodity-related positions, which performed strongly.

“With hedge funds up +5.68%, May was the best month for hedge funds since February 2000, when the index was up +6.83,” said Lee Hennessee , Managing Principal of Hennessee Group . “Gains were largely driven by arbitrage strategies. However, long/short equity managers, with reduced levels of exposure, also performed well, participating significantly in the market rally while maintaining hedges. With a market correction in the short term being a possibility, we feel that most hedge funds are positioned conservatively and will be able to quickly alter exposures to protect capital if the market experiences a correction.”

“May had the biggest one month run up in commodities in 35 years,” commented Charles Gradante. “It appears to us, from Hennessee Group research and manager conversations, to be speculative and led by commodity ETF demand, which exceeds "real" demand. Furthermore, margin requirements favor the speculators. Hedge funds are betting commodities will continue to rise with many long agriculture commodities, such as sugar and corn.”

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Hartford Business – State Treasurer Denise L. Nappier said she plans to approve rule changes by January allowing her to allocate up to 8 percent of the state’s $20 billion pension fund in nontraditional investments such as hedge funds.

The move marks a departure from a more conservative investment strategy and comes shortly after the Connecticut funds lost nearly $5 billion in pension assets in the depressed market.

The shift in approach also comes when the hedge fund industry is under stress. The sector’s total assets declined by more than 20 percent between June and October, and the unraveling of Bernard Madoff’s $50 billion Ponzi scheme this month has spotlighted what many see as a general lack of transparency in the industry.

Still, Nappier said investing in hedge funds and other alternative instruments will allow the pension plan to reduce volatility, produce slightly higher returns and create better diversification.

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