Hedge Funds Stutter In January
Tuesday, February 16, 2010

After a roaring 2009 for hedge funds, 2010 has started with something of a whimper for most hedgies, with hedge fund indexes having reported moderate losses in the first month of the year.

Hennessee Group LLC, an adviser to hedge fund investors, announced last week that the Hennessee Hedge Fund Index declined -0.50% in January as the main equity benchmarks reversed early rallies to end the month firmly in negative territory.

“January was a challenging month as the equity rally was short lived and reversed course mid-month. Managers were defensively positioned with low net exposures and were able to limit losses,” commented Charles Gradante, Co-Founder of Hennessee Group.

Last month, the S&P 500 declined -3.70%, the Dow Jones Industrial Average declined -3.46%, and the NASDAQ Composite Index declined -5.37%. Bonds rallied, as the Barclays Aggregate Bond Index increased 1.53%.

Gradante said that one of the greatest concerns for fund managers is the sustainability of the current economic recovery given that government stimulus in the US cannot continue at its current pace. "The stimulus has not helped the private sector, which is largely responsible for creating new jobs,” he observed. “Rather, the government is looking to increase regulation on business and banks, as well as increase taxes, which will further disinterest businesses from investing."

Meanwhile, RBC Capital Markets has reported that for the month of January 2010 the RBC Hedge 250 Index had a net return of -0.18 per cent. While only four out the indexes 9 strategy groups lost ground last month, overall performance was dragged lower by particularly heavy losses in the managed futures sector, which lost 3.08% in January. Equity long/short strategy also declined, losing 0.82% in January, although overall losses were muted by strong performances by fixed income arbitrage funds, which gained 2.44%, and event driven strategies, which gained 2.5%.

However, Credit Suisse/Tremont has reported that, based on early estimates, the Credit Suisse/Tremont Hedge Fund Index (Broad Index) will finish up 0.17% in January, taking into account data on the 74% of assets which have reported so far.

Long/short equity funds outperformed major equity markets in January, finishing down an estimated 1.70% as managers’ lower net exposures protected them from the full brunt of the market correction, Credit Suisse/Tremont announced. "Many managers would have finished in positive territory were it not for long positions in Technology stocks which, despite good fundamentals, fell in January on fears over the economic recovery," the firm said.

In general, equity markets reacted negatively to news of the Greek budget deficit and the concomitant drop of Greek bond prices as well as the Chinese central bank’s credit tightening over concerns of overheating in their housing market, the firm noted.

Credit Suisse Tremont also reported that event driven managers had a generally positive month as a number of managers took advantage of inefficient pricing in smaller issue securities resulting from specific restructuring events as well as banks in Japan and Europe lightening their books. Credit markets generally performed well and were negatively correlated to equity markets, benefiting a number of credit-oriented managers, the firm added.