December Gains Small Consolation For Hedge Fund Investors After Savage 2008

by Carla Johnson, Investors Offshore.com

13 January 2009

Hennessee Group LLC, an adviser to hedge fund investors, has announced that the Hennessee Hedge Fund Index advanced 0.51% in December, although the index ended last year down by more than 19% as hedge funds failed to get to grips with one of the worst bear markets for many years.

While the figures make grim reading for hedge fund investors, Lee Hennessee, Managing Principal of Hennessee Group, said that the index has still outperformed equity benchmarks on a relative basis by almost 20%.

By comparison, the S&P 500 advanced 0.78% in December, but fell by 38.49% over the course of last year. Meanwhile, the Dow Jones Industrial Average declined 0.60% last month and 33.84% last year, and the NASDAQ Composite Index advanced 2.70% last month and fell 40.54 in 2008. Bonds advanced, as the Barclays Aggregate Bond Index increased 3.73% in December, finishing the year up by 5.24%.

“On a relative basis, hedge funds continue to prove themselves as an attractive asset class, generating a better risk-adjusted return than traditional money management. Investment committees are revisiting their mandates to increase allocations to hedge funds," Hennessee said.

“The Fed is intent on normalizing interest rate spreads between Treasuries, corporates and consumer rates,” added Charles Gradante, Co-Founder of Hennessee Group. “According to Hennessee Group research, credit spread strategies should be one of the top performing strategies to invest for 2009. Credit spreads for high yield over Treasuries are currently more than 18%, more than 3 times its average since 1990. Credit strategy managers will be able to put up some impressive gains.”

Still, most of the strategies in the Hennessee index performed miserably last year: the Arbitrage/Event Driven Index declined by 18.57%; the Distressed Index by 26.3%; the Hennessee Long/Short Equity Index by 18.34%; and the Hennessee Global/Macro Index by 20.72%. The only bright spot was the Hennessee Macro Index, which ended the year up by 3.37%.

“Year-end redemptions were significant, as the average fund returned 15% to 25% of investors’ assets. Combined with negative performance and complete liquidations, the entire hedge fund industry started 2009 at close to 50% of the capital it was at the beginning of 2008,” continued Gradante.

However, he concluded on an optimistic note that: "this should be a positive for funds as less capital will be chasing the same long/short trades, which should lead to better returns."

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