February 8, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, today announced that the Hennessee Hedge Fund Index declined –2.45% in January while the S&P 500 declined –6.12%, the Dow Jones Industrial Average fell –4.63%, and the NASDAQ Composite Index declined –9.89%. Bonds rose in January, as the Lehman Aggregate Bond Index increased +1.92%.
“January was a difficult start to the year for most hedge fund strategies,” said E. Lee Hennessee, Managing Principal of Hennessee Group. “The Hennessee Hedge Fund Index had its fourth worst month in history behind August 1998 [Russian default], April 2000 [bursting of the technology bubble], and July 2002 [WorldCom default].”
The Hennessee Long/Short Equity Index declined –2.79% in January, as equity market volatility created a difficult environment for most funds. Winners from 2007 were the stocks that sold off the most in January, causing funds that posted gains in 2007 to post rather substantial losses in January. Likewise, financial and housing related industries that were especially weak in 2007, outperformed in January. Furthermore, many funds reduced portfolio risk as a result of heavy declines in equity indices at the beginning of the month. Many funds were under-exposed to a strong rally in equity indices at month end.
“Many hedge funds have turned relatively negative on U.S. equities in recent months,” said Charles Gradante, Managing Principal of Hennessee Group. “Most see weakening top line revenue growth due to economic weakness, while cost pressures are likely to cause margins to tighten from historically high levels, as commodity prices are causing real problems for most industries. As such, net exposures at most funds have declined by at least 10% in recent months.”
The Hennessee Arbitrage/Event Driven Index declined -1.04% in January. Credit strategies were again weak, as the Hennessee Distressed Index declined –2.45% for the month. The spread on the Merrill Lynch High Yield Index widened from 5.4% to 5.8% over Treasuries as signs of an increase in the default rate began to emerge and liquidity remained poor. Most expect the high yield default rate to increase to 4% by the end of 2008. Convertible arbitrage benefited from higher levels of equity implied volatility, as the Hennessee Convertible Arbitrage Index advanced +0.58% for the month. Merger arbitrage spreads also widened because of the turmoil in the equity markets and financing difficulties for several LBOs still in backlog. The Hennessee Merger Arbitrage Index declined –0.74% in January.
“Macro funds are adding to their short position in the 10 Year Treasury, while holding onto their long position in the 2 Year Treasury, believing that the yield curve is likely to steepen,” continued Mr. Gradante. “This reflects the view that stagflation is a real threat. Oil and gold are being shorted as supplies of both have exceeded demand, while manager are long agricultural products, especially sugar.”
The Hennessee Global/Macro Index declined –2.92% in January. International equity funds fared worse than their U.S. counterparts, as European and Asian equity prices fell, as investors now doubt that Asia has decoupled from the U.S. economy. The Hennessee International Index declined –3.24% in the month. However, macro funds performed well, as the Hennessee Macro Index advanced +1.35%. As a result of the 1.25% decline in the Fed Funds rate during the month, yields on most Treasuries declined substantially with the 2-Year Treasury ending the month at 2.2%.
About the Hennessee Group LLC
Hennessee Group LLC is a Registered Investment Adviser that consults direct investors in hedge funds on asset allocation, manager selection, and ongoing monitoring of hedge fund managers. Hennessee Group LLC is not a tracker of hedge funds. The Hennessee Hedge Fund Indices® are for the sole purpose of benchmarking individual hedge fund manager performance. The Hennessee Group does not sell a hedge fund-of-funds product nor does it market individual hedge fund managers. For additional Hennessee Group Press Releases, please visit the Hennessee Group’s website. The Hennessee Group also publishes the Hennessee Hedge Fund Review monthly, which provides a comprehensive hedge fund performance review, statistics, and market analysis; all of which is value added to hedge fund managers and investors alike.
Description of Hennessee Hedge Fund Indices®
The Hennessee Hedge Fund Indices® are calculated from performance data reported to the Hennessee Group by a diversified group of over 1,000 hedge funds. The Hennessee Hedge Fund Index is an equally weighted average of the funds in the Hennessee Hedge Fund Indices®. The funds in the Hennessee Hedge Fund Index are derived from the Hennessee Group’s database of over 3,500 hedge funds and are net of fees and unaudited. Past performance is no guarantee of future returns. ALL RIGHTS RESERVED. This material is for general information only and is not an offer or solicitation to buy or sell any security including any interest in a hedge fund.