April 9, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, today announced that the Hennessee Hedge Fund Index declined –2.02% in March (-3.52% YTD) while the S&P 500 declined –0.60% (-9.93% YTD), the Dow Jones Industrial Average fell –0.03% (-7.55% YTD), and the NASDAQ Composite Index advanced +0.34% (-14.06% YTD). Bonds rose throughout the month, as the Lehman Aggregate Bond Index advanced +0.34% (+2.17%).
“March proved to be very difficult for many hedge funds as extreme levels of volatility have been difficult to manage,” said E. Lee Hennessee, Managing Principal of Hennessee Group. “The collapse of Bear Stearns caused many funds to reduce equity exposure, which was followed by a rally in equities on news of a bailout.”
The Hennessee Long/Short Equity Index declined –2.03% in March (-4.33% YTD), ending the worst quarter for the Long/Short Equity Index since the third quarter of 2002 when WorldCom defaulted on its debt. While losses are expected from long/short equity funds in declining equity markets, losses were larger than typical in the first quarter as many funds were unable to generate alpha in long and short portfolios.
“We are seeing a number of hedge funds invest in ‘levered loans’ that banks have priced in the mid 80s in an attempt to finally sell some of the ‘hung bridge loans’ of the past LBO boom,” said Charles Gradante, Managing Principal of Hennessee Group. “This should provide a floor for the high yield debt markets unless defaults pick up beyond current expectations of 4%, which would likely require a very deep recession.”
The Hennessee Arbitrage/Event Driven Index declined –1.39% in March (-2.46% YTD). The Hennessee Distressed Index declined –1.12% in March (-3.14%). High yield credit spreads widened to a peak of 8.5% over Treasuries at mid month before tightening at month end. Many managers have reported purchasing levered loans as they have become more attractively priced in recent months. Further, while most managers believe that corporate defaults will increase over the next twelve months, thus creating opportunities in distressed debt, the amount of defaulted debt as of now is limited, causing many managers to hold high levels of cash. The Hennessee Merger Arbitrage Index declined –0.49% in March (-1.93% YTD). Spreads widened as a result of volatility in the equity markets and the termination of several private equity sponsored buyouts due to financing issues. The Hennessee Convertible Arbitrage Index declined –2.12% in March (-1.74% YTD). While volatility spiked at mid month (the VIX reached a high of 37 on the day of the Bear Stearns bailout), it subsequently fell by month end. Further, weakness in the credit markets made for a difficult environment for convertibles.
“Due to the collapse of the fixed income markets, macro managers are finding opportunities in municipal bonds, auction rate preferred securities, and mortgages,” continued Mr. Gradante. “All of these asset classes are trading at spreads to Treasuries that haven’t been seen in decades.”
The Hennessee Global/Macro Index declined –2.74% in March (-3.48% YTD). International equity markets lagged those in the U.S., as the MSCI EAFE Index declined –1.52% (-9.53% YTD). Performance for international long/short equity funds also trailed that of U.S. long/short equity funds, as the Hennessee International Index declined –3.26% (-3.91% YTD). The Hennessee Macro Index declined –2.16% for the month, although was the only strategy outside of short biased to post positive returns for the quarter (+2.28% YTD). The commodity boom, which had thus far avoided the global aversion for risk over the past nine months, was finally upset in March. The Reuters-CRB Index declined –8.7% in March led by agricultural commodities. The dollar resumed its decline throughout the month, as the euro appreciated from $1.51 to $1.58. The Federal Reserve lowered rates by 0.75% following Bear Stearns’ collapse, although the ECB has yet to lower rates in this easing cycle.
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.
