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New York (HedgeCo.net) – Hennessee Group LLC, an adviser to hedge fund investors, voiced concern in early 2009 that the global financial crisis could enter a new and more dangerous phase, one that could push several international countries to the brink of failure and further hinder the global economic recovery.
Of particular concern to the Hennessee Group was the dramatic growth in external debt exposures of G7 and emerging countries and the increasing risk of another outright failure similar to that of Iceland when they had a debt to GDP ratio exceeding 900%. However, Hennessee Group research now indicates that this risk has begun to subside as the majority of countries have experienced a decline in their overall external debt exposure in recent months after reaching all time highs in 2008. That said, the Hennessee Group now believes this development could come at the cost of economic growth as the majority of the decline in external debt has been due to a dramatic drop off in bank lending to foreign institutions.
Charles Gradante, Co-Founder of the Hennessee Group, noted “While the decline in external debt, particularly for countries like the U.K., is a positive development and is likely to reduce the risk of another Iceland, we fear the primary driver behind the external debt reduction, specifically the drop off in external bank lending, could ultimately slow the pace of the global economic recovery.” The Hennessee Group believes it is essential to global growth that banks resume prudent external lending to businesses and individuals to further alleviate the financial crisis and promote economic growth.
In its February 2009 research paper, the Hennessee Group highlighted numerous countries, particularly in the euro zone, that appeared to be building uncomfortably high external debt levels in recent years relative to their economic output. The bright spot, at that time, was the low level of U.S. external debt to GDP output (84%).
The Netherlands reached an external debt to GDP ratio of approximately 328%, while Ireland had a similar exposure ratio to that of Iceland, a staggering 900%. The UK’s debt to GDP ratio reached 456% while Switzerland’s rose to 433%.
Gradante stated, “We believe the build up in external debt was both alarming and unsustainable, particularly for many European countries, and that if the trend continued we could be at risk of a major systemic event.” Gradante continued, “Since our initial analysis, the majority of countries have started to reduce external lending.
The U.K. has decreased its external debt by nearly $3.5 trillion from its high of $12.1 trillion in the first quarter of 2008. While we believe this is a positive development from the perspective that it alleviates our initial concern regarding another Iceland; a closer look at the underlying numbers has revealed a new concern. The vast majority of the reduction is due to a decline in external bank lending, which we believe will present additional challenges going forward. Of the $3.5 trillion decline in the U.K. external debt, $2 trillion can be attributed to a drop off in external bank lending. This could present additional challenges to an economic recovery.”
The Hennessee Group believes this new trend is not just a problem isolated to the U.K. but rather a worldwide issue. In a recent press release by the Bank for International Settlements, they stated, “After a relatively small change in total outstanding stocks in the third quarter, banks’ external claims shrank by 5.4% in the fourth quarter of 2008 ($1.8 trillion at constant exchange rates), to $31 trillion.” They added, “This was the largest reduction ever recorded.” The global economy may very well struggle to recover if the banks remain unwilling to increase external debt lending and may result in a resurrection of protectionism.
HedgeCo.net (West Palm Beach) – Hedge fund investor consultant and adviser, Hennessee Group LLC, today announced some highlights from the first half of 2009 and the month of June, excerpts follow:
“Most hedge fund managers are not buying into the ‘Green Shoots’,” commented Charles Gradante, Co-Founder of Hennessee Group. “While markets rallied sharply in April and May, most managers remained conservative. I think we have reached an inflection point as momentum seems to have faded. We should see a return to stock picking based on fundamentals, which are rather negative. In addition, the technicals are also bad, leading us to believe in a summer correction.”
“Hedge funds have outperformed equity benchmarks by a 10% margin in the first half of 2009,” said Lee Hennessee, Managing Principal of Hennessee Group. “The outperformance is largely due to the ability of hedge funds to profit from their short portfolios, as we saw in January and February. While hedge funds are routinely publicized as high risk vehicles, the reality of the situation is that the average hedge fund has demonstrated significantly less volatility than traditional asset classes for the 22 years we have been advising investors.”
Despite a flat June, the second quarter gain was the strongest quarterly gain since 1998. In June, energy and materials sectors declined as worries mounted that the global economy could experience a drawn out recovery after the World Bank cut the global growth forecast.
Managers remain concerned that the recent rally in the financial markets and resurgence in confidence is built on hope supported by government stimulus rather than a real improvement in fundamentals (i.e., employment and housing).
Long/short equity funds will continue to rely on individual security selection while maintaining low levels of directional exposure as the official second quarter earnings season gets under way with the Alcoa earnings announcement on July 8th. Many managers are overweight technology in long portfolios, the top performing sector for the month and the year, while maintaining short positions in consumer and financial sectors.
Managers have found opportunities in strategic acquisition activity as well as distressed merger and acquisition activity.
After three months of strong gains, emerging markets cooled, declining slightly in June, but are substantially positive year to date. China was one of the few bright spots in June as the equity markets continued to advance. The Hennessee Macro Index declined -1.08% in June (+7.10% YTD).
While May was a record breaking month for commodities, June brought a sharp pull back. Positions in gold, silver, and agricultural commodities all detracted from performance as prices fell. Managers also suffered losses as the U.S. dollar rallied versus most currencies on speculation that the current market rally has ended and reports that the Fed will not expand its purchases of Treasuries. Oil was a positive, up +5.4% in June; although, many believe that prices are being driven by speculation and expect profit taking as oil is up +56.4% thus far this year.
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West Palm Beach (HedgeCo.net) – “Hedge funds finished up 4.06% in May, capturing the largest monthly gains since February 2000." Oliver Schupp, President of Credit Suisse Index, said, Emerging Markets funds were the strongest performers, finishing up 6.96%. The Emerging Markets sector has experienced a significant turnaround over the last three months as risk appetite seems to be returning to markets, and investors are encouraged by positive signs of global growth and rising commodities prices.” Schupp added, “Convertible Arbitrage managers also performed well during May as funds capitalized on the overall appreciation in convertible bonds globally. The Convertible Arbitrage sector has been up every month this year, and redemption pressure seems to have eased substantially as a result.”
The Credit Suisse/Tremont Hedge Fund Index (“Broad Index”) is the industry’s premier asset-weighted hedge fund index. Unlike equal-weighted indices, the Broad Index does not underweight top performers and overweight decliners to provide the most accurate representation of the hedge fund universe.
Alex Akesson
Edtior for HedgeCo.Net Email: alex@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
