Hedge Funds Advance
Tuesday, April 13, 2010

The Hennessee Group, an adviser to hedge fund investors, has announced that the Hennessee Hedge Fund Index advanced 3.05% in March, although hedge funds generally underperformed the broader stock market indices.

“Hedge funds posted a strong, positive month in March, but underperformed the sharply rising equity markets due to conservative positioning and difficulty shorting,” said Lee Hennessee, Managing Principal of Hennessee Group. “Top performing strategies included emerging markets, financial equities, and distressed.  All underlying hedge fund strategies were positive in March, with the exception of short biased.”

In March, the S&P 500 increased 5.88%, the Dow Jones Industrial Average advanced 5.15%, and the NASDAQ Composite Index advanced 7.14%.  Bonds fell slightly, as the Barclays Aggregate Bond Index decreased -0.12%.

“The financial markets seem to have quickly forgotten about sovereign risk and concerns about central bank exit strategies.  Investors remain willing to assume greater levels of risk, and equity markets rallied sharply in March,” commented Charles Gradante, Co-Founder of Hennessee Group.  “However, as the second quarter begins, hedge fund managers are generally cautious.  Their key concern is that the Fed is moving forward with its plans to end and eventually reverse its easing of credit.”

The Hennessee Long/Short Equity Index advanced 3.07% in March as the equity markets continued to move higher, erasing losses from earlier in the year and leading to broad based gains for most major market indices in the first quarter. 

Hennessee said that a solid earnings season coupled with additional data points suggests that a sustainable economic recovery could be in place. However, a collapse in the 'velocity of money,' a measure of how many times a dollar is re-used in the economy, could be a signal that  ‘a 50 year super cycle in lending’ is coming to an end, which may curtail future economic growth, the company noted.

“Since lending has been a key driver of economic growth over the past decades, this points to more muted growth over the long term.  Managers state that this is partly the result of banks refusing to lend and are closely monitoring the banking industry," said Gradante.

A record level of undistributed corporate profits suggests that there could be an increase in merger and acqusition activity, Gradante observed, leading to upward pressure on prices.

“Managers report that undistributed corporate profits hit an all-time high of USD527bn at a seasonally adjusted annual rate. In addition, according to a Strategas report, nonfinancial companies in the S&P 500 have a record USD830bn of cash on their books,” he said. “Many believe that these cash stockpiles could lead to a pick up in mergers and acquisitions, which could serve as a catalyst for higher prices as it did in 2006 and 2007.”