Hennessee Hedge Funds Flat In December

by Carla Johnson, Investors Offshore.com

11 January 2008

Hennessee Group LLC, an adviser to hedge fund investors, has announced that the Hennessee Hedge Fund Index advanced 0.30% in December, finishing 2007 up 11.64%.

December's performance for the Hennessee index was marginally better than the major US equity benchmarks, which posted small declines over the month. The S&P 500 declined 0.86%, the Dow Jones Industrial Average fell 0.80%, and the NASDAQ Composite Index declined 0.33%. The Lehman Aggregate Bond Index advanced 0.28%.

“December was again a solid month for hedge funds, as most funds were able to hold their own in another difficult equity environment,” explained E. Lee Hennessee, Managing Principal of Hennessee Group. “Most strategies posted gains in December and all 23 of the Hennessee Hedge Fund Sub-Indices outperformed the S&P 500 for the year.”

“Equity markets posted their first negative fourth quarter in ten years,” added Charles Gradante, Managing Principal of Hennessee Group.

The Hennessee Long/Short Equity Index advanced 0.25% in December, finishing last year up 12.08%. The Hennessee Group noted that the financial and consumer sectors continued to be the weakest sectors across the equity markets, while energy and technology were again standout performers during the month.

"As has been the case throughout the year, there was a high differentiation among industry and stock returns (five sectors were positive and five sectors were negative), creating a good environment for bottom up stock pickers," the group stated in its performance report.

“The market continues to price in a higher likelihood of a recession for 2008 and is calling for more rate cuts,” observed Mr. Gradante. “Unfortunately, the Fed is in a bind as inflation continues to inch higher as evidenced by last month’s inflation report indicating CPI grew 0.8% in November, the largest increase in over two years. We believe inflation is somewhat out of the Fed’s control and being largely affected by demand for commodities from BRIC countries.”

The Hennessee Arbitrage/Event Driven Index advanced 0.10% in December (up 7.78% YTD), as volatility in the equity and fixed income markets again affected arbitrage strategies. Despite widening credit spreads, the Hennessee Distressed Index posted a gain of 0.95% for the month ( 8.87% YTD). For the year, high yield credit spreads widened from 2.9% to 5.8% over the 10 Year Treasury although defaults remain at 26 year lows. Widening credit spreads also posed problems for convertible arbitrage funds, as the Hennessee Convertible Arbitrage Index declined 0.40% (up 4.36% YTD).

Implied volatility remained at elevated levels, as the VIX ended the year at 22.5. The Hennessee Merger Arbitrage Index declined 0.17% (up 11.58% YTD) as a few deals broke and spreads widened as a result of the volatility in equities.

“Macro managers made substantial gains with a three legged trade in 2007 - short the dollar, long gold, and long oil. The declining dollar and rising oil prices gave way to a 30% increase in the price of gold in 2007,” continued Mr Gradante. “In 2008, gold may receive demand for other reasons. Gold is the third currency for central bank reserves and central banks are too concentrated in dollars and euros and therefore want to diversify out of dollars and euros into gold.”

The Hennessee Global/Macro Index advanced 0.56% in December (up 15.59% YTD). While equities generally declined globally, long/short international funds were able to hold their own, as the Hennessee International Index advanced 0.79% (up 20.02% YTD). Macro funds also performed well as the Hennessee Macro Index advanced 2.08% (up 15.13% YTD). Strong gains were generated in commodities, especially oil, which approached $100 per barrel, and gold, which eclipsed $800 per troy ounce. The dollar reversed course to rally against both the euro and yen, while Treasury prices were generally flat, despite the fact that the Fed lowered rates by 25 basis points in the month.

Recommended