Hennessee Hedge Fund Index Advanced 2% In April

by Philip Morton, Investors Offshore.com

15 May 2008

Hennessee Group LLC, an adviser to hedge fund investors, has announced that the Hennessee Hedge Fund Index advanced 2% in April, recapturing some of the losses experienced in March.

However, despite the rebound, the Hennessee index trailed the main equity markets in April, with the S&P 500 advancing 4.75%, the Dow Jones Industrial Average rising 4.54% (-3.36% YTD), and the NASDAQ Composite Index gaining 5.87% (-9.02% YTD). Bonds fell slightly, as the Lehman Aggregate Bond Index declined 0.21% (+1.95%).

The Hennessee Hedge Fund Index is down 1.95% for the year-to-date, but the fact that the S&P 500 is down 5.65% YTD, the Dow Jones is down 3.36% YTD, and the NASDAQ is down 9.02% YTD suggests that hedge funds have contained losses felt through the broader markets this year.

“Hedge funds lagged the overall markets in April, as is expected given the recent surge in equities,” noted E. Lee Hennessee, Managing Principal of Hennessee Group. “That said, most managers are fearful of a recession, as conversations have changed from whether there will be a recession to how deep and prolonged it will be.”

The Hennessee Long/Short Equity Index advanced 2.02% in April (-2.92% YTD), as equities continued to advance following a sharp rally subsequent to the buyout of Bear Stearns in March. Hennessee observed that most long/short equity funds remain conservatively positioned, believing that the financial and housing crisis of the past nine months will likely translate into substantially slower economic growth going forward. Furthermore, most believe that sell-side earnings estimates are generally high for the remainder of 2008.

“The Hennessee Group is concerned about the conditions in the Dutch auction rate securities market,” announced Charles Gradante, Managing Principal of Hennessee Group.

“A seminal event is developing. Sellers have continuously overwhelmed buyers, causing widespread auction failures for the first time in 25 years. Banks, which normally provide liquidity during periods of supply/demand imbalances, are not doing so, adding to the list of concerns about bank balance sheets. Hedge funds are looking at opportunities in this market that are well collateralized.”

The Hennessee Arbitrage/Event Driven Index advanced 1.42% in April (-1.39% YTD). The Hennessee Distressed Index rose 1.28% in April (-1.55% YTD). Hennessee says that despite the bankruptcy filings of several airlines and retailers, high yield credit spreads tightened substantially from 8.2% to 6.9% over Treasuries.

Most credit managers believe that defaults will continue to increase, high yield debt will likely continue to sell off and, as such, are holding high levels of cash.

The Hennessee Merger Arbitrage Index advanced 1.87% in April (-0.21% YTD). Hennessee observed that merger spreads tightened as a result of reduced volatility in the equity markets, and the more accommodating credit markets provided better financing options for LBOs and cash takeovers.

The Hennessee Convertible Arbitrage Index advanced 0.60% in April (-1.55% YTD). Credit related gains were offset by volatility related losses, as the VIX declined from 25.6 to 20.8.

“Spreads on oil contracts, which were wide and are now tightening, indicate speculators are topping out,” Gradante continued. “Just three months ago, oil was at USD86. The 50% run-up has a lot of speculation in it.”

“Hennessee Group’s research indicates that Brazil’s three month rate of 11.6% continues to attract money flows, while the real is expected to hold its own against the dollar,” he further commented.

“The real is up 16.7% versus the US dollar in the last twelve months, and Standard & Poor’s recently upgraded Brazilian debt to investment grade.”

The Hennessee Global/Macro Index advanced 2.23% in April (-1.52% YTD). International equities rose along with those in the US, as the MSCI EAFE Index advanced 4.95% (-5.06% YTD).

Returns were the strongest in the emerging markets in comparison to more developed markets. Performance for international long/short equity funds was similar to that of US long/short equity funds, as the Hennessee International Index advanced 2.60% (-1.68% YTD).

The Hennessee Macro Index advanced 1.57% for the month (+3.17% YTD). Commodities resumed their recent surge, as oil prices rose to USD120 per barrel.

The lone exception was gold which declined from USD904 to USD867 during the month, which many believe to be a seasonal adjustment in demand.

Recommended