November 10, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined –5.52% in October (-15.30% YTD), while the S&P 500 declined -16.94% (-34.02% YTD), the Dow Jones Industrial Average declined -14.06% (-29.70% YTD), and the NASDAQ Composite Index declined -17.73% (-35.11% YTD). Bonds declined, as the Lehman Aggregate Bond Index declined -2.36% (-1.73% YTD).
“While the Hennessee Hedge Fund Index is down -15.73% this year, it has outperformed the S&P 500 on a relative basis by almost 20%” commented Lee Hennessee, Managing Principal of Hennessee Group. “It has certainly been a challenging year, but hedge funds have worked to preserve capital in an extremely challenging market environment.”
“While September was challenging due to several extraordinary and unexpected events, managers were able to weather October’s volatility better given their reduced exposures,” said Charles Gradante, Co-Founder of Hennessee Group. “2008 is on pace to be the worst year ever for hedge funds; however, hedge funds have still managed to outperform on a relative basis.”
“Massive deleveraging resulted in significant declines across the board, resulting in the ‘worst month in history’ for most risk assets. While many managers are seeing very attractive investment opportunities, they are struggling to retain investors and their capital bases,” said Charles Gradante. “Thus far, we have seen more funds freeze redemptions, utilize redemption gates, reduce fees, and liquidate than in the history of the hedge fund industry.”
The Hennessee Long/Short Equity Index declined –5.49% in October (-14.31% YTD). Managers were defensively positioned with significantly reduced exposures, but still suffered losses as equity markets declined substantially. Losses were broad based as all sectors were down double digits for the month. While the ban on short selling was lifted at the beginning of the month, a positive for hedge funds, losses on the long side of portfolios more than offset gains from hedges and short positions.
“Heavy selling is distorting prices, as technicals and fear are overwhelming longer-term fundamentals,” said Charles Gradante. “This market dislocation is leading to a number of opportunities to earn attractive unlevered returns in several arbitrage areas including convertible arbitrage, merger arbitrage and distressed. Several managers are purchasing senior secured loans, where prices traded into the 60s, and in some cases, fell below the levels of unsecured bonds.”
The Hennessee Arbitrage/Event Driven Index declined –4.70% in October (-13.45% YTD). Despite a generally defensive posture on credit, the Hennessee Distressed Index declined –5.48% in October (-17.70% YTD), as the spread on the Merrill Lynch High Yield Index widened sharply from 1096 bps to 1617 bps during the month. The Hennessee Merger Arbitrage Index declined –0.18 % in October (-0.86% YTD). Given the backdrop of volatility, illiquidity and frozen credit markets, confidence in mergers eroded and deal spreads, particularly on anything requiring financing, widened substantially. The Hennessee Convertible Arbitrage Index declined –10.38% (-21.34% YTD), as convertible funds continued to experience their worst consecutive loss in history. Sharply widening spreads and secondary market cheapening made negative contributions. In addition, funds had to face higher funding costs, increasingly restrictive margin requirements, redemption-forced selling and continued deleveraging.
“As Hennessee Group reported in its October 8th press release, Europe was forced to lower short term rates, which was profitable for macro managers,” said Charles Gradante. “Managers also made money long the U.S. dollar as the currency markets are seeing dramatic moves as the liquidity-induced carry trades of the last few years continue to unwind rapidly.”
The Hennessee Global/Macro Index declined –5.48% in October (-17.68% YTD). International equities continued to decline sharply in October with the MSCI EAFE Index declining -20.24% (-45.02% YTD) as global markets faced de-leveraging and a flight to quality. The Hennessee International Index declined –4.27% (-19.79% YTD) as managers maintained significant cash balances and benefited from a late month rally. The Hennessee Macro Index advanced +0.61% for the month (-0.29% YTD). Managers profited from a ‘global recession trade’ where they are long duration bonds while short equities and credit. Managers also benefited from positive momentum with the U.S. dollar as it rallied sharply during the month.
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.