Hedge Funds Protect Capital as Equity Markets Drop Sharply

June 8th, 2012
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Contributed by: PR Newswire
Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -1.98% in May (+2.15% YTD), while the S&P 500 fell -6.27% (+4.19% YTD), the Dow Jones Industrial Average decreased -6.21% (+1.44% YTD), and the NASDAQ Composite Index declined -7.19% (+8.53%). Bonds were mixed, as the Barclays Aggregate Bond Index increased +0.90% (+2.33% YTD) and the Barclays High Yield Credit Bond Index declined -1.31% (+5.05%).

“May was a tough month for risk assets. European worries returned with vengeance resulting in a flight to quality and ‘risk off’ trading. Despite conservative positioning, hedge funds posted their worst monthly loss since September 2011, falling -2%,” commented Charles Gradante, Managing Principal of Hennessee Group. “Many managers are frustrated that they did not ‘sell in May and go away’. May turned out to be a repeat of the previous two Mays [2011 and 2010] due to renewed worries over a financial crisis in Europe, a hard landing in China, and an economic slowdown in the U.S.”

“While many managers anticipated a ‘risk off’ period, they still incurred losses due to a modest net long exposure. Hedge funds were able to protect capital relative to equity markets by being down only one-third the broad market. ” said Lee Hennessee, Managing Principal of Hennessee Group. “With the outperformance in May, hedge funds were able to narrow the gap on year to date performance. For the year, hedge funds are up more than +2% and have displayed significantly less volatility than the broad markets. Managers continue to be conservatively positioned with a cautious outlook for the short term.”

Equity long/short managers posted their worst monthly loss since September 2011, as the Hennessee Long/Short Equity Index declined -1.89% (+2.27% YTD). With earnings season over, equity markets were driven by macro news, poor employment data, and a somewhat disappointing result for the Facebook IPO. Weakness was broad based with the worst performing sectors being energy (-10.62%), financials (-9.32%), materials (-7.99%) and technology (-7.85%). Global equity markets also declined sharply in May as European sovereign debt and bank liquidity concerns resulted in a sharp increase in investor risk aversion. While hedge funds were conservatively positioned at the beginning of May, managers still suffered losses due to a modest net long exposure. The best performing managers were positioned more conservatively with net short exposure or low net long exposure. As concerns about Europe began to flare, managers aggressively reduced risked. Managers remain conservatively positioned as they are cautious about the short term. In addition to the concerns about Europe, which has not fixed its structural problems, managers are concerned about the political situation in the U.S. and the impending “fiscal cliff”. Managers expect continued volatility throughout the year and expect performance to be driven by “alpha generation” related to individual investment opportunities and themes rather than “beta exposure”.

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Related Article Tags: Multi-Strategy, Long Short, Equity, Debt and Global Macro Hedge Fund News; Hedge Fund Resources and Featured Partner News


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