Hedge Funds Down -0.73 In March, Says Hennessee

A weak equity markets contributed to negative performance of hedge funds in March, as the Hennessee Hedge Fund Index declined 0.73% (+0.32% YTD). The broad market indices were also negative for the month as the S&P 500 declined 1.77% (

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A weak equity markets contributed to negative performance of hedge funds in March, as the Hennessee Hedge Fund Index declined -0.73% (+0.32% YTD).

The broad market indices were also negative for the month as the S&P 500 declined -1.77% (-2.15% YTD), the Dow Jones Industrial Average declined -2.44% (-2.60% YTD), and the NASDAQ Composite Index declined -2.56% (-8.11% YTD). Hedge funds posted positive performance for the first quarter, as the Hennessee Hedge Fund Index is up +0.32%, while all of the broad equity market indices remain negative for the year through March. Both the equity and bond markets experienced a negative quarter, the first time that both have been negative in the same quarter since the first quarter of 2000.

“For the first time since 2000, both markets (bonds and equities) had negative performance for the quarter,” said Charles Gradante, managing principal of Hennessee Group LLC. “This is indicative of the struggle hedge funds are having.” The Hennessee Long/Short Equity Index declined -1.02% (-0.64% YTD) in March. Managers reported a difficult month in their long portfolio as all the major equity indices were down in March. Macro concerns regarding the impact of oil prices and the Fed’s talk of “increased pricing power across a variety of industries” negatively affected the equity market. The oil induced market sell-off which led to indiscriminate selling presented managers with compelling values on the long side. As a result, managers added to existing names to their long portfolios. Managers strongly believe fundamentals are not the primary driver of recent stock volatility.

“The liquidity game is coming to an end and so are low bond default rates,” said Gradante. “As Fed funds get closer to 4%, hedge fund managers we research foresee an increase in bond defaults and are consequently decreasing credit risk.” The Hennessee Arbitrage/Event Driven Index was flat in March, returning 0.00% (+0.79% YTD), as gains in merger arbitrage were offset by losses in convertible arbitrage. While implied volatility increased partially as a result of the sell off in the equity markets and rising inflation fears, convertible arbitrage returns were weak due to credit related losses. After experiencing gains for the previous two years, the credit markets were finally disturbed by General Motors’ lowered earnings guidance and fears of a downgrade of their debt to junk status. Many arbitrage managers have noted that convertible valuations are more compelling today than at any point over the previous two years, and have begun buying convertible bonds. Finally, merger arbitrage returns were positive due to a few competitive bids, including Verizon and Qwest’s attempted takeover of MCI.

The Hennessee Global/Macro Index declined -1.02% (+1.90% YTD) in March. Higher interest rates across the yield curve initiated a U.S. dollar rally against both the Euro and Japanese yen, negatively impacting manager’s short dollar positions. International equity markets also sold off in tandem with those in the U.S. after several months of outperformance versus the U.S. equity markets.

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