NEW YORK (HedgeWorld.com)--For those who spent their November days worrying about hedge funds' poor performance in October and their nights fretting over hedge funds' return correlation with equity markets, news about November's positive returns for hedge funds in the Hennessee Hedge Fund Index may ease the days, but will probably generate still more sleepless nights.
The index overall was up 1.42% last month, but that performance was driven largely by broad market gains, said E. Lee Hennessee, managing principal at the Hennessee Group LLC, which compiles the index. The Standard & Poor's 500 stock index rose 3.78% in November, while the Dow Jones Industrial Average was up 3.5% and the Nasdaq Composite index returned 5.31%. Bonds also saw good performance, with the Lehman Brothers Corporate Bond Index up 0.44%.
"Managers were able to participate in the market rally, but were hurt by their short portfolios as the rising tide floated all ships, not just the good ones," Ms. Hennessee said in a statement.
The S&P Hedge Fund Index reported an overall November return of 0.07%.
Hennessee's long/short equity index rose 1.3% last month after falling 1.7% in October. Why? According to Hennessee, managers increased their net exposure in October to take advantage of markets that rallied on the hope that the U.S. Federal Reserve would stop raising interest rates.
Short-biased managers got walloped in November, courtesy of the rallying equity markets. Short sellers in the Hennessee index lost 4.36%. For the year, the long/short equity index is up 4.99%.
The Hennessee arbitrage/event driven index was up 1% in November, a complete reversal from October's negative 0.76% return. Convertible arbitrage managers continued to chip away at the wall of negative returns they built early in the year, earning 0.16% in November. For the year they are down 3.04%. Concerns about year-end redemptions in convertible arbitrage so far have proved unfounded, according to Hennessee. And issuance of convertible securities rose relative to earlier months.
Merger arbitrage managers were up 1.14% in November after falling 1.42% in October. Strong deal flow in November helped that strategy.
Distressed managers also had a good November, generating a return of 1.27% as spreads widened, according to Hennessee.
"Arbitrage strategies continue to be impacted by a flattening of the yield curve and general weakness in the credit markets due to higher event risk, especially the ease and speed of Delphi's bankruptcy filing, and most recently the demise of Calpine and Refco," said Charles Gradante, managing principal of the Hennessee Group, in a statement.
Hennessee's global macro index rose 2.29% in November and is up 11.07% for the year. Global macro's strong month was helped by rising prices on the Japanese Nikkei stock index, which hit a five-year high in November; by gold prices, which hit an 18-year high last month; and by the rally of the U.S. dollar against the euro. Oil prices were lower in early November, but rallied late to finish flat for the month, according to Hennessee.
"Gold is a beneficiary in a world where all countries want a lower exchange rate than their trading partners. Some macro players are betting that gold will move to US$800 an ounce long term," Mr. Gradante said in a statement (February gold futures prices reached US$544.50 an ounce Dec. 12, nearing a high reached almost 25 years ago. "Many feel that whether inflation takes hold, or there is pressure for relative pricing parity between gold and oil, or we have a weakening in major currencies, gold will be a beneficiary."
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