Key Takeaways
- • Hennessee Group's hedge fund index posted a modest 2.5% gain in January 2012, trailing the S&P 500 (4.4%), Dow Jones Industrial Average (3.4%), and Nasdaq Composite (8.0%), underscoring persistent underperformance relative to broad equities.
- • Hedge fund performance in January rebounded from a severely depressed 2011, when the Hennessee index fell 4.27%—the worst annual return since the 2008 financial crisis—driven by European sovereign debt concerns and macro headwinds.
- • Equity long/short strategies emerged as the top-performing hedge fund strategy in January, with the Hennessee Long/Short Equity Index advancing 2.47%, benefiting from rising stock markets led by technology and financials sectors and improving U.S. economic data.
- • Declining stock correlations within sectors are creating tailwinds for long/short equity managers, as lower correlations enable fundamental stock-pickers to generate alpha through individual security selection rather than relying on broad market beta.
- • Lee Hennessee, managing principal of Hennessee Group, characterized the January rebound as "encouraging," noting that gains materialized despite managers maintaining conservative positioning heading into the new year.
Summary
Hedge fund performance stabilized in January 2012 following a difficult 2011, though managers continue to underperform major stock indices. According to Hennessee Group, the industry's primary performance benchmark, the Hennessee hedge fund index rose 2.5% in January—a respectable recovery but still lagging the S&P 500's 4.4% gain, the Dow Jones Industrial Average's 3.4% advance, and the Nasdaq Composite's robust 8.0% climb. The bounce-back marks a sharp reversal from 2011's weakness, when the Hennessee index declined 4.27%, marking the worst year for hedge funds since the 2008 financial crisis.
The 2011 downturn reflected significant headwinds from Europe's sovereign debt crisis and deteriorating macroeconomic sentiment globally, which prompted many managers to reduce risk exposure and maintain defensive positioning. Lee Hennessee, managing principal of Hennessee Group, noted the positive momentum: "It is encouraging to see a respectable gain even with managers conservatively positioned," indicating that January's gains occurred without aggressive re-risking, suggesting underlying market improvement rather than leveraged speculation.
Equity long/short strategies led hedge fund performance in January, with the Hennessee Long/Short Equity Index advancing 2.47%. The strategy benefited from rising stock markets, particularly strength in technology and financials sectors, coupled with continued signs of improvement in U.S. economic data. Beyond market tailwinds, structural conditions are aligning favorably for fundamental stock-pickers within the long/short space. According to portfolio manager Giles Worthington at RiverCrest Capital, stock correlations within sectors have declined significantly as markets have rallied this year, reducing the beta-driven component of returns and creating opportunities for security selection based on individual company merit. Worthington observed: "Correlations are falling with quite a powerful force and diversity in stock returns is rising," a dynamic that strengthens the case for active fundamental management versus passive or momentum-driven strategies.
The January rebound and improving tactical environment offer a degree of vindication for hedge fund managers after an exceptionally challenging 2011, though the persistent gap versus broad equity indices remains a structural challenge for the industry amid higher fee structures and capacity constraints.
The 2011 downturn reflected significant headwinds from Europe's sovereign debt crisis and deteriorating macroeconomic sentiment globally, which prompted many managers to reduce risk exposure and maintain defensive positioning. Lee Hennessee, managing principal of Hennessee Group, noted the positive momentum: "It is encouraging to see a respectable gain even with managers conservatively positioned," indicating that January's gains occurred without aggressive re-risking, suggesting underlying market improvement rather than leveraged speculation.
Equity long/short strategies led hedge fund performance in January, with the Hennessee Long/Short Equity Index advancing 2.47%. The strategy benefited from rising stock markets, particularly strength in technology and financials sectors, coupled with continued signs of improvement in U.S. economic data. Beyond market tailwinds, structural conditions are aligning favorably for fundamental stock-pickers within the long/short space. According to portfolio manager Giles Worthington at RiverCrest Capital, stock correlations within sectors have declined significantly as markets have rallied this year, reducing the beta-driven component of returns and creating opportunities for security selection based on individual company merit. Worthington observed: "Correlations are falling with quite a powerful force and diversity in stock returns is rising," a dynamic that strengthens the case for active fundamental management versus passive or momentum-driven strategies.
The January rebound and improving tactical environment offer a degree of vindication for hedge fund managers after an exceptionally challenging 2011, though the persistent gap versus broad equity indices remains a structural challenge for the industry amid higher fee structures and capacity constraints.
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