Hennessee Group LLC says that hedge funds underperformed the S&P 500 in September. The Hennessee Hedge Fund Index advanced +0.08 percent in September, while the S&P 500 DRI advanced +2.58 percent, the Dow Jones Industrial Average rose +2.62 percent, and the NASDAQ Composite Index climbed +3.42 percent.
Bonds also gained in September, as the Lehman Brothers Intermediate Government Corporate Bond Index increased +0.79 percent.
“The performance of hedge funds in September indicates that most managers have moved their portfolios to a more cautious positioning,” says E. Lee Hennessee, the Managing Principal of Hennessee Group LLC. “Net exposures have declined significantly over the past four months as managers have decided to reduce risk in their portfolios until it’s clear on whether the economy will experience a soft or hard landing”
The Hennessee Long/Short Equity Index advanced +0.54 percent in September. Long/short equity funds lagged the broad equity indices, which were generally strong due to another pause by the Fed and lower energy prices. The Dow Jones Industrial Average approached its all-time high several times in September, eventually reaching new highs in early October.
The Hennessee Arbitrage/Event Driven Index declined in September, returning -0.26 percent. The most significant event during the month was the spectacular decline of Amaranth Advisors, which reportedly experienced heavy losses within its energy-trading portfolio. Convertible arbitrage funds experienced a good month, up +0.86 percent. While credit spreads tightened, implied volatility ended close to where it began the month. Many convertible arbitrage managers have expressed their concern about rising valuations within the convertible market and have taken steps to reduce portfolio risk. Merger arbitrage also posted a positive month, as the Hennessee Merger Arbitrage Index advanced +0.42 percent. Merger and acquisition activity continued to grow in the third quarter, as $748 billion of transactions were announced worldwide, up +16 percent from the same period of 2005, according to Thomson Financial. Within credit-oriented strategies, the Hennessee Distressed Index posted a gain of +0.22 percent, as credit spreads continued to tighten.
“Unlike the collapse of Long Term Capital Management in 1998, there haven’t been any signs of contagion due to Amaranth’s collapse,” adds Charles Gradante, the Managing Principal of Hennessee Group LLC. “Other arbitrage strategies, such as convertible arbitrage and merger arbitrage, posted positive returns, an indication of the health of each of these strategies.”
The Hennessee Global/Macro Index declined -0.37 percent in September. International long/short equity funds experienced positive returns as the Hennessee International Index advanced +0.48 percent. However, macro funds continued to struggle as the Hennessee Macro Index declined -2.18 percent. The U.S. bond market continued to strengthen in September, as the yield on the 10-Year Treasury Note declined from 4.73 percent to 4.64 percent. Energy prices fell substantially throughout the month due to the economic slowdown and increasing inventories. Natural gas prices fell from $5.80 to $3.66, a decline of 37 percent in September. Oil prices declined to end the month at $63 per barrel, before reaching $59 in early October.