Hennessee Envisages Improved Hedge Fund Returns in 2005

by Phillip Morton, Investors Offshore.com

21 January 2005

Adviser to hedge fund investors, Hennessee Group has unveiled a review of hedge fund strategies for 2004 and made its predictions for hedge fund strategies in 2005.

According to the firm, hedge funds generally trailed the broad market averages in 2004, as the S&P 500 DRI advanced 10.9%, while the Hennessee Hedge Fund Index advanced 8.3%.

Hennessee explained that a number of factors contributed to this situation, principally conservative net exposures due to uncertainty related to Iraq, the US election and high oil prices. In addition, low equity market volatility and low interest rates exacerbated the difficult trading climate.

The Hennessee Long/Short Equity Index gained 8.4% in 2004, and while last year was more favourable for short sellers than 2003, most managers’ profits suffered in the short side due to the strong fourth quarter for the equity market.

However, Hennessee’s research shows that most market participants expect relative performance for long/short equity strategies to improve in 2005 and achieve returns of 8% to 10%, as higher interest rates and lower levels of liquidity are met with lower GDP growth and slower corporate earnings growth.

This should create a more favourable environment for stock picking and short selling, as high quality companies generally outperform low quality companies, Hennessee predicted.

Expectations are for 5-6% returns in convertible arbitrage in 2005, assuming no increase in leverage in comparison to 2004. Most managers expect returns for merger arbitrage to be approximately 8% in 2005 as a result of higher interest rates and higher levels of merger and acquisition activity in the US, Europe and Asia.

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