The Hennessee Hedge Fund Index has advanced +0.33 percent in July (+8.96 percent YTD).
“Thus far, it has been a good year for hedge funds as a whole, despite the collapse of several funds focused on fixed income,” says E. Lee Hennessee, Managing Principal of Hennessee Group. “The increase in equity market volatility has been welcome by short sellers who have had a tough time over the past four years.”
The Hennessee Long/Short Equity Index declined -0.12 percent in July (+8.09 percent YTD). Stocks again sold off in July due to concerns about the mortgage and corporate bond markets. Short portfolios performed well, especially those focused on housing and mortgage deterioration. Lower rated traunches of sub-prime mortgage backed indices declined by as much as -40 percent during the month. Furthermore, the widening of corporate credit spreads slowed the pace of leveraged buyout transactions (LBOs), creating a better environment for short selling.
The majority of stocks rumored to be LBO candidates fell substantially during the month, as most lost the takeover premium embedded in their stock prices as a result of the financing concerns.
“$300 billion of LBO deals are in the pipeline waiting to be repriced, creating the potential for a major bond and equity market correction,” says Charles Gradante, Managing Principal of Hennessee Group. “We are monitoring the credit markets closely, especially the commercial paper market.”