August 13, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, estimates that while most global equity markets have declined more than -20% from their peak in October 2007, the Hennessee Long/Short Equity Index has increased +0.15% over the same period. As the equity markets have entered into a “technical” bear market, hedge fund money managers have successfully protected capital in a severe and volatile down market due to hedging and adjustment of gross and net portfolio exposures with respect to market movements.
The latest research data highlighted a trend in the hedge fund industry that money managers, in an environment of increasing volatility and uncertainty, have reduced their risk appetite and reallocated investments to cash and less risky assets. The 176% gross exposure at the end of the second quarter of 2007 represented the highest gross exposure for the average hedge fund since before 2003. Hennessee Group’s research indicates that the average net exposure of long/short equity hedge funds decreased by -16% over the past year, from +52% at the end of the second quarter 2007 to +36% in the second quarter of 2008. The tightening of net exposures over the last year was largely due to managers’ trimming of margin and long portfolios, as the average long portfolio declined -21% from +114% (Q2 2007) to +92% (Q2 2008). The short positions were only trimmed by -5% from -62% (Q2 2007) to -57% (Q2 2008). These portfolio adjustments reflected negative market bias by managers.
“Hedge funds have maneuvered long, short, and cash investments to minimize losses and protect capital in a particularly challenging bear market,” continued Mr. Charles Gradante, Managing Principal of Hennessee Group LLC. “We continue to see evidence of alpha generation as a result of portfolio construction and adjustments that have insulated hedge funds from the current market downturn.”
* Based upon analysis of 100 long/short equity hedge fund managers.
In reviewing past exposures, it appears that hedge fund managers gradually increased both net and gross exposures from the first quarter of 2003 until the second quarter of 2007 in order to participate in the bull market run over that period. Exposure levels peaked at the end of the second quarter, just prior to S&P 500’s highest close in 2007. As the broad market began to decline amid credit turmoil, net and gross exposure levels also started to decrease. “Currently, money managers are less willing to choose a market direction and instead prefer to maintain cash positions (with the lowest net exposure since 2003) in preparation for improved investment opportunities,” stated Mr. Gradante, Managing Principal of Hennessee Group LLC.
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.