March 10, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, today announced that the Hennessee Hedge Fund Index advanced +1.28% in February (-1.43% YTD) while the S&P 500 declined –3.48% (-9.39% YTD), the Dow Jones Industrial Average fell –3.03% (-7.52% YTD), and the NASDAQ Composite Index declined –4.95% (-14.35% YTD). Outside of Treasuries, the fixed income markets were in more disarray than equities. The Lehman Aggregate Bond Index declined –0.56% (+1.35% YTD).
“While it was a reasonable month for long/short equity funds in February, it continues to be an extremely difficult market for fixed income funds,” said E. Lee Hennessee, Managing Principal of Hennessee Group. “Several fixed income focusing on investment grade mortgages and municipal bonds have recently faced margin calls and been forced to unwillingly sell assets.”
The Hennessee Long/Short Equity Index advanced +0.93% in February (-2.44% YTD). Whereas equity market volatility proved difficult to navigate in January, funds were able to benefit from the increase in volatility in February. Short portfolios acted as a better hedge in February, providing protection from the market’s decline. While most long/short equity managers are finding a number of attractively priced opportunities, most recognize the market’s poor liquidity will likely drive prices in the short term and potentially allow for purchases at lower levels.
“It’s likely that AIG’s write-off within its credit default swap portfolio will be followed by similar write-offs by many of the large banks,” said Charles Gradante, Managing Principal of Hennessee Group. “Banks may have another $200 billion to write-off as the result of being on the wrong side of this trade if they mark-to-market these contracts. Furthermore, the commercial real estate market is showing signs of weakness due to over-levered real estate investors.”
The Hennessee Arbitrage/Event Driven Index advanced +0.34% in February (-1.11% YTD). The Hennessee Distressed Index advanced +0.79% for the month (-2.07% YTD). While spreads widened in most areas of corporate debt, many credit oriented funds posted positive returns as yields have started to reach attractive levels to compensate for widening spreads. Several small companies filed for bankruptcy and most expect more defaults in the coming months. The Hennessee Merger Arbitrage Index declined –0.56% for the month (-3.32% YTD). While strategic merger and acquisition activity picked up with several high profile hostile deals in the technology and commodity sectors, merger spreads were generally weaker throughout the month because of high equity volatility. Hung LBO deals are slowly being completed although most continue to have difficulty obtaining attractively priced financing. The Hennessee Convertible Arbitrage Index declined –0.56% in February (+0.08% YTD). Despite the market’s sell off, implied volatility as measured by the VIX was virtually flat for the month while credit spreads widened. Many funds are starting to find more attractive opportunities within convertibles as a result of the strategy’s poor performance in 2007.
“Macro managers are diversifying their agricultural portfolios to include major positions in sugar because, on an inflation adjusted basis, sugar is the cheapest commodity and more cost effective than corn in producing ethanol,” continued Mr. Gradante.
The Hennessee Global/Macro Index advanced +2.55% in January (-0.46% YTD). After struggling in January, international equities and international long/short equity funds outperformed their U.S. counterparts in February. The Hennessee International Index returned +2.51% (-1.44% YTD), while both the MSCI Europe and MSCI Asia-Pacific Index posted positive returns for the month as economic weakness in the U.S. has yet to spread to other regions of the world. The Hennessee Macro Index advanced +3.92% for the month (+5.88% YTD), as almost every theme common among macro funds posted positive returns. Commodities (especially oil, gold, platinum, grains) were strong throughout the month, the U.S. yield curve steepened, the U.S. dollar weakened versus both the euro and the yen, and emerging market equities outperformed U.S. equities.
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.
