October 8, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined –6.24% in September (-10.28% YTD), while the S&P 500 declined -9.08% (-20.57% YTD), the Dow Jones Industrial Average declined
-5.78% (-18.20% YTD), and the NASDAQ Composite Index declined -12.0% (-21.51% YTD). Bonds declined, as the Lehman Aggregate Bond Index declined -1.34% (+0.64% YTD).
“Despite being defensively positioned, September was the worst month for hedge funds in over a decade” said Charles Gradante, Co-Founder of Hennessee Group. “The ban on short selling caused significant losses across most strategies and required funds to alter their trading models.”
“Hedge funds have outperformed on a relative basis year to date. However, given their reduced exposures over the first 9 months of the year, I would expect hedge funds to be down less,” commented Lee Hennessee, Managing Principal of Hennessee Group. “Violent theme reversals, extreme volatility and unpredictable intervention have contributed to negative performance.”
The Hennessee Long/Short Equity Index declined -5.86% in September (-9.31% YTD). The majority of losses came in the last two weeks of the month as the government decided to restrict short selling and liquidity disappeared. The intervention created a massive short squeeze, while long positions were pushed lower by de-leveraging/liquidity concerns. Managers have further reduced net and gross exposure as the markets continue to respond to fear and liquidity, rather than fundamentals.
“Convertible arbitrage portfolios faced massive mark to market losses” said Charles Gradante. “The short-selling ban, financial defaults and forced selling resulted in a sharp decline in prices. However, the dislocation has created convertible opportunities as attractive as they have ever been.”
The Hennessee Arbitrage/Event Driven Index declined –6.38% in September (-9.22% YTD). The Hennessee Distressed Index declined –3.85% in September (-10.31% YTD), as the spread on the Merrill Lynch High Yield Index widened sharply from 836 bps to 1096 bps during the month, a level not seen since 2002. The Hennessee Merger Arbitrage Index declined –1.77% in September (+0.71% YTD), as short selling restrictions handicapped managers ability to put on trades. Merger arbitrage spreads have pushed out to very attractive levels with many deals now offering annualized returns of more than 20%, double the level of a few months ago. The Hennessee Convertible Arbitrage Index declined –11.25% in September (-13.40% YTD), its worst month in history. Convertible arbitrage portfolios were under severe negative pressure due to the SEC’s ban on short-selling of financial names and indiscriminate selling due to liquidations. They were also hurt by the defaults/near defaults of Lehman Brothers, Fannie Mae, AIG, Washington Mutual and Wachovia, whom had all tapped the convertible market for capital.
“Many macro managers are betting on lower interest rates in Europe,” stated Mr. Gradante. “Currently, Europe has an inverted yield curve while credit spreads are widening. This should help force Europe to lower short term rates and steepen their yield curve. It will also help the credit markets.”
The Hennessee Global/Macro Index declined –5.93% in August (-12.74% YTD). International equities continued to decline sharply in September with the MSCI EAFE Index declining -14.71%
(-31.07% YTD) as global markets faced de-leveraging and a flight to quality. Performance for international long/short equity funds was worse than U.S. funds, as the Hennessee International Index declined –8.00% (-15.76% YTD). Weakness was broad-based, but especially painful in emerging markets such as Russia and Brazil. The Hennessee Macro Index declined –1.73% for the month (-0.16% YTD). Managers continued to suffer as commodities sold off, as the Reuters/ Jefferies CRB index has declined -43% from its peak in early July. Macro managers were able to generate profits as investors poured into gold amid concerns of a global recession. “Many macro managers have put on a ‘global recession trade’,” stated Mr. Gradante. “They are long duration bonds while short equities and credit.”
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.