'December Effect' Bodes Well for Hedge Funds, Equities

Hedge fund advisory firm the Hennessee Group believes the equity markets are likely to continue their momentum and lead to additional gains for investors during the month of December.

“We believe the December Effect, whereby investors choose to defer paying taxes on equity market gains until the following year, will provide additional support to the equity markets as we close out the year,” said Charles Gradante, co-founder of the Hennessee Group. “And historical data seems to support this thesis as the equity markets have experienced gains during the final month of the year 70% of the time when positive through the month of November.” Additionally, says Gradante, hedge funds have experienced gains in December 100% of the time during the same calendar year periods.

The December Effect: Equity Markets And Hedge Funds

The Hennessee Group recently conducted a brief study examining the historical performance of the equity markets and hedge funds when entering the final month of the year with positive year-to-date gains. The study focused on the calendar year periods dating back to 1995; using the S&P 500 Index and the Hennessee Hedge Fund Index as proxies. As illustrated in the chart below, dating back to 1995, the S&P 500 Index has generated positive returns through November in 10 calendar year periods and experienced additional gains in December 70% of the time. In comparison, hedge funds managed to generate gains in nine of the calendar year periods the S&P 500 Index was positive through November and experienced gains in December 100% of the time.

YTD-Nov.		Dec. Only
Year	S&P500	Hennessee Hedge Fund Index	S&P500	Hennessee Hedge Fund Index
1995	31.82%	15.79%	1.74%	1.65%
1996	22.91%	17.67%	-2.15%	1.20%
1997	28.98%	16.84%	1.57%	1.16%
1998	19.91%	-0.28%	5.64%	1.70%
1999	12.97%	22.57%	5.78%	6.70%
2003	20.28%	16.75%	5.08%	1.76%
2004	5.57%	6.31%	3.25%	1.82%
2005	3.12%	6.10%	-0.10%	1.66%
2006	12.23%	9.99%	1.26%	1.28%
2007	4.44%	10.85%	-0.86%	0.33%
Positive	10	9	7	10

Note: Hedge funds experienced a challenging period in 1998 due in large part to the failure of Long-Term Capital Management.

"The data supports the December Effect Theory and bodes well for investors as we close out 2009. Hennessee Research indicates that when the equity markets were positive through November, they gained on average +2.1% in December while hedge funds gained +1.9%,” said Gradante.

Optimistic Hedge Fund Outlook For 2010

While the Hennessee Group is optimistic for both the equity markets and hedge funds heading into the final month of the year due to the December Effect, the firm is more optimistic that hedge funds are well positioned for a good year on a relative basis in 2010. According to Gradante, fundamentals will matter again in the coming year which should lead to an increase in dispersion between sectors and individual stocks, particularly as the rally gets long in the tooth.

In addition, he says, the equity markets are likely to trade in a range as opposed to trend in one particular direction in 2010. Gradante says such an environment should favor hedge funds relative to their traditional counterparts as they will have the opportunity to generate alpha on both the long and short side of their portfolios while not having to rely on market direction or beta for returns.

Comments

[uhuh]

The December effect : When a bunch of corrupt government officials decide to reward wall street cronies with Christmas bonuses at the taxpayers expense.Concurrently wall street pundits and wall street media cover up the insane reverse Robin hood action by ignoring it altogether or somehow using intellectual capital to justify it Then everyone gets together on Manhattan or long island and congratulates each other on their hard work and sacrifices to make the event possible...

2009 Nov 30 05:10 PM

[FINalternatives]

CORRECTION: Typo in the chart for 1998 -- the Hennessee Hedge Fund Index was down a mere 0.28%, not 28%...apologies.

2009 Nov 30 06:37 PM

[RWD2]

If tax rates rise next year, wouldn't it be smarter to pay the taxes this year?

2009 Nov 30 09:45 PM

[DougM]

Taxes are scheduled to go back up in 2011. So, no worried until this time next year. Near the end of 2010 people will be looking at 5%+ increase in marginal tax rates and a jump from 15% to 25% in the LT cap gains rates - significant incentives to cash in before the calendar rolls.

2009 Nov 30 10:43 PM

[damienhaas]

"experienced additional gains in December 70% of the time. In comparison"

How about the other 30 percent? How about last year? It will be much better to at the current stock trend and chart.

2009 Dec 01 01:11 AM

[jamesparker1]

Hi

Great information about the Hennessee Group recently conducted a brief study examining the historical performance of the equity markets and hedge funds when entering the final month of the year with positive year-to-date gains.

2009 Dec 01 05:18 AM

[Mick Weinstein]

We've corrected the chart with the proper Hennessee data - thanks.


On Nov 30 06:37 PM FINalternatives wrote:

> CORRECTION: Typo in the chart for 1998 -- the Hennessee Hedge Fund
> Index was down a mere 0.28%, not 28%...apologies.

2009 Dec 01 05:45 AM