When the abrupt correction in U.S. equity markets struck on Tuesday Feb. 27 following the huge sell-off in Asia leading to a one-day 416-point drop in the Dow Jones Industrial Average, analysts quickly began looking for scapegoats. And as predictable as dozens of analysts calling it a tremendous buying opportunity, were those wanting to blame hedge funds and predicting a huge hedge fund failure as a result.
Turns out hedge funds did quite well in February, posting their best month relative to the S&P 500 since January 2003, according to the Hennessee Hedge Funds Index. The index returned 1.09% for the month with the S&P 500 declining 2.18%.
Charles Gradante, managing principal of Hennessee Group LLC, says that hedge funds were not only able to profit from their ability to short securities but also likely took profits on their long exposure to the market. “As the market moved above the 200-day moving average, hedge funds cut back on their net exposure. On Jan. 1 if they had a net exposure of 50%, by February it was down to 30%,” Gradante says.
He adds that hedge funds were aggressive sellers of sub-prime lenders who were hit particular hard in the recent sell-off. “Hedge funds made a lot of money shorting sub-prime lenders.”
The best sectors, according to Hennessee, were Event Driven, 1.86%; Distressed, 1.70%; and Opportunistic, 1.67%.
Ironically, managed futures, which usually perform well in bear equity markets, suffered in February. The preliminary estimate for the Barclay CTA index showed a 0.79% drop in February. The drop was due to the sharp reversals in equity indexes and interest rate futures.
Registration strike out
In March, Senator Charles Grassley (R-Iowa) attempted to amend the 9/11 homeland security bill, then being debated on the floor of the Senate, to require that certain hedge funds register with the Securities and Exchange Commission (SEC). The SEC’s Hedge Fund Registration rule became effective in February 2006 but was defeated in Federal appeals court in the Goldstein vs. SEC decision.
A spokesperson for Grassley said the amendment was rejected as part of the overall management of the 9/11 bill. “[The Senator] intends to continue to pursue the issue,” the spokesperson said.
In Futures March Top Traders feature, the second column in the graphic “Top CTA Programs in 2006,” contains the managers’ upside STD/downside STD measure. Also, in the same article, in “Raithel: Writing profits,” his program returned 11.98% in 2001 and it returned 35.73% in 2006.