Hedge Fund Tracking Agencies Predict Poor Month For Their Sector

by Mike Godfrey, Tax-News.com, New York

04 May 2001

Agile market bears who piled into suddenly-fashionable long/short hedge funds early this year did well until March, but will have lost in April, according to a report from hedge fund tracker Hennessee Group. Charles Gradante, Hennessee's President and CEO said: 'April was a good month for the stock market, so hedge fund managers who followed a strategy of selling stocks short probably got killed. Going into April short sellers were up 9 percent but then the market turned around and now they are down 5 percent on the month but still up 4 percent for the year.'

The turnaround in market sentiment followed April's Federal Reserve interest rate cut, the fourth such move this year. After plunging over 60 percent from an all-time high, the technology heavy Nasdaq Composite Index surged 15 percent last month, marking its fifth best month ever. The broader blue chip S&P 500 index rose about 8 percent. For the year however the benchmark indices are still down, leaving short-selling hedge funds the better performers.

Tremont Advisors, another hedge fund consultancy, agreed that April would have been bad for hedge fund investors. 'April is a month I would expect short sellers to be down. But many hedge fund managers were underinvested because there is no real trend now, so the damage was probably limited, '' said Bruce Ruehl, chief investment strategist. The Van Hedge Group, another industry tracker, said the average U.S. hedge fund fell 1.1 percent in the first quarter and outperformed the S&P 500's 11.9 percent drop.

Of course, the whole point about hedge fund managers is that they pick and choose the stocks they short, otherwise they wouldn't have been able to make the money they did during the long-lasting bull run. Unlike index-tracking mutual funds, they don't have to follow the market; nor, like mutual funds, are they restricted to only making money when stocks go up. So statistical measures of how hedge funds 'ought' to have done based on overall market movements aren't a very good guide to how they actually did, and since most of them operate in an unregulated fringe alongside the main mutual fund market, they don't disclose their results anyway.

This may change, as hedge funds emerge from obscurity and become mainstream investments, since if they want to advertise to a mass market of investors they will have to follow transparency and reporting rules to match. But that's when to stop investing in them and look for the next wave . . .

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