Hennessee Hedge Funds Lag Equities In April

by Phillip Morton, Investors Offshore.com

14 May 2007

Hennessee Group LLC, an adviser to hedge fund investors, has announced that the Hennessee Hedge Fund Index advanced 1.92% in April (5.44% YTD).

The Hennessee index lagged behind the major equity benchmarks last month as shares surged; the S&P 500 rose 4.33% (4.53% YTD), the Dow Jones Industrial Average increased 5.74% (4.81% YTD), and the NASDAQ Composite Index advanced 4.27% (4.54% YTD). Bonds also appreciated in April, as the Lehman Intermediate Government Corporate Bond Index advanced 0.48% (2.08% YTD).

“While the strong equity markets have been a wind at the back of hedge fund performance, most funds continue to be relatively conservatively positioned,” explained E. Lee Hennessee, Managing Principal of Hennessee Group LLC. “Many are concerned about the continued deterioration in housing, increasing inflation, extraordinarily tight credit spreads, and a weak dollar.”

The Hennessee Long/Short Equity Index advanced 1.85% in April (5.15% YTD). First quarter earnings reports were generally better than expected, acting as a catalyst for the Dow Jones Industrial Average to eclipse 13,000 and again set new all-time highs.

“While first quarter GDP growth of 1.3% failed to meet expectations, the majority of the decline in growth was due to housing,” added Charles Gradante, Managing Principal of Hennessee Group LLC. “Given the decline in housing, most managers have been surprised about the strength of consumer spending, which represents two-thirds of the overall US economy."

The Hennessee Arbitrage/Event Driven Index increased 1.61% in April (5.72% YTD). Credit and event driven strategies posted strong returns, over-shadowing muted convertible arbitrage returns. The Hennessee Distressed Index posted a gain of 2.09% (6.91% YTD), as corporate bond spreads again continued to tighten. Merger arbitrage experienced yet another positive month, as the Hennessee Merger Arbitrage Index advanced 1.77% (5.80% YTD). The positive equity markets, combined with a heavy amount of new deal flow, caused a favorable environment for merger arbitrage. The Hennessee Convertible Arbitrage Index advanced 0.15% (3.58% YTD), although it was a somewhat difficult month as many funds posted negative performance. Convertible issuance was again robust, causing the market to cheapen as it digested the increase in supply.

The Hennessee Global/Macro Index advanced 2.32% in April (5.33% YTD). While international equity markets generally performed in line with US equity markets, the Hennessee International Index advanced 3.32% (6.72% YTD) in April, outperforming its US brethren. The Hennessee Macro Index advanced 1.97% (3.34% YTD) in April. In addition to contributions from long equity exposure, macro funds also benefited from weakness in the US dollar, as the Euro advanced from $1.33 to $1.37.

“Most macro managers are concerned about the dollar, as interest rates in Europe continue to increase and the current account deficit is now 7% of GDP, which is an all-time high for the US,” stated Mr Gradante. “Fundamentals are strong in the economy and the market, however, a free fall in the dollar is the Achilles’ heel of this market.”

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