Press Release


Hedge Funds Continue to Underperform Due to Conservative Positioning


September 9, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.72% in August (-4.09% YTD), while the S&P 500 rose +1.22% (-12.63% YTD), the Dow Jones Industrial Average advanced +1.45% (-12.98% YTD), and the NASDAQ Composite Index advanced +1.80% (-10.74% YTD).  Bonds advanced, as the Lehman Aggregate Bond Index advanced +0.95% (+2.01 YTD).

“This is the worst start to a year for hedge funds since the beginning of the Hennessee Hedge Fund Index in 1987,” commented Charles Gradante, Co-Founder of Hennessee Group. 

“Hedge funds underperformed in August as the majority of funds were defensively positioned,” said E. Lee Hennessee, Managing Principal of Hennessee Group.  “However, relative to the equity benchmarks, including the S&P 500 (-12.63% YTD) and MSCI World Index (-15.20% YTD), hedge funds are outperforming by a significant margin.”

The Hennessee Long/Short Equity Index declined -0.22 % in August (-3.20% YTD).  The extreme volatility experienced during the month of July coupled with the unease regarding higher oil prices and a slowing economy, led many managers to enter August defensively positioned with low exposures to the equity markets.  The sharp drop in oil prices and subsequent equity market rally in August, left many hedge fund managers struggling to keep up with the broad market equity indices.  Managers lost money as short bets on consumer discretionary names rallied and long bets in the energy and commodity-linked sectors sold off sharply.

“The recent sharp sell off in commodities has provided some relief to material costs,said Charles Gradante.  “Inflation should decline over the next 12 to 18 months to within the Fed’s target range.  The real concern will be GDP growth, and we may see additional interest rate cuts in an attempt to avoid a recessionary/deflationary scenario .”

The Hennessee Arbitrage/Event Driven Index rose +0.31% in August (-2.66% YTD).  Despite a slight widening of credit spreads from 8.00% to 8.05% over Treasuries, managers were able to generate profits due to a positive carry and a generally defensive posture on credit, as the Hennessee Distressed Index advanced +0.10% in August (-4.84% YTD).  “While credit spreads are up sharply from an average spread over the past five years of 4.50% and finished the month wider than they were during the Bear Stearns bailout, the Hennessee Group still believes there is more widening of high yield credit spreads to come,” commented Charles Gradante.  

The Hennessee Merger Arbitrage Index advanced +1.38% in August (+3.03% YTD), and is one of the top performing strategies for the year.  Managers state that current spreads are attractive with annualized returns in the double digits, while the quality of deals continues to improve. Dealflow has also picked up from credit crunch lows.  The Hennessee Convertible Arbitrage Index declined –0.48% in August (-2.52% YTD).  Wider credit spreads were a drag on convertibles' performance during the month, while volatility, as measured by the VIX, decreased from 22.65 to 20.65 at the end of August.  Some investors stepped in on market weakness as valuations richened during the month. 

 “The U.S. government has taken a major step in resolving the credit crisis by intervening and taking control of Fannie Mae and Freddie Mac,” stated Mr. Gradante. “Hennessee Group research concludes that lower mortgage rates and the creation of a “Good Bank” and “Bad Bank” is the path to take.  This will allow the “Good Bank” to focus on new lending, while the “Bad Bank” focuses on workouts.”

The Hennessee Global/Macro Index declined –2.27% in August (-7.22% YTD).  International equities continued to decline in August with the MSCI EAFE Index declining -4.29% (-19.18% YTD).  Performance for international long/short equity funds was worse than U.S. funds, as the Hennessee International Index declined –1.90% (-8.38% YTD).  Weakness was broad-based, but especially painful in emerging markets. 

The Hennessee Macro Index declined –1.93% for the month (+2.28% YTD).  A strong rally in the U.S. dollar (+6% in August versus the euro) hurt both international managers with unhedged global positions and macro managers who have been negative on the dollar. Managers continued to suffer as commodities sold off, as the Reuters/Jefferies CRB index tumbled -5.9% in August after falling double-digits in July. The sharp reversal has led to some well publicized losses and even liquidations of high profile energy and commodity-related hedge funds in recent weeks. 

See Hennessee Group White Paper “Next Fed Move More Likely to be Down, Not Up” (August 19, 2008).


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. 



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