Hedge Funds Continue to Outperform Equity Markets by Wide Margin, but Face Challenges Hennessee Group LLC, an adviser to hedge fund investors, says that the Hennessee Hedge Fund Index declined -2.69% in November (-18.44% YTD), while the S&P 500 declined -7.48% (-38.97% YTD), the Dow Jones Industrial Average declined -5.32% (-33.44% YTD), and the NASDAQ Composite Index declined -10.77% (-42.09% YTD). Bonds advanced, as the Lehman Aggregate Bond Index increased +3.30% (+1.50% YTD).
“While the Hennessee Hedge Fund Index is down -18.44% this year, it has significantly outperformed equity benchmarks on a relative basis,” says Lee Hennessee, managing principal of Hennessee Group. “While not an attractive absolute return, many investors are thankful to have hedge fund allocations this year, especially when compared to traditional asset classes. While many managers are seeing attractive investment opportunities, many are struggling to retain investors and their capital bases. In 2008, we have seen dramatically more hedge funds freeze redemptions/enact redemption gates and force liquidate than in the history of the hedge fund industry.” said Charles Gradante. “We expect year-end investors’ redemptions to be significant, with the average fund returning 15% to 25% of investors’ assets. When you consider the significant number of liquidations, redemptions and the negative performance of hedge funds this year, it is possible that the entire hedge fund industry could start 2009 at 40% the size it was at the beginning of 2008.”
The Hennessee Long/Short Equity Index declined -3.00% in November (-17.65% YTD). Managers continue to position portfolios very defensively with significantly reduced exposures; however, managers still suffered losses as equity markets declined substantially and as funds faced heavy volatility. Several managers report that equity valuations have reached attractive levels, and they have started to leg into long positions with a long-term time horizon. However, they realize that stocks may continue to get cheaper. Many are selling for tax purposes, but are planning on putting money to work in the future.
The Hennessee Arbitrage/Event Driven Index declined -3.25% in November (-23.23% YTD). The Hennessee Distressed Index declined -1.81% in November (-21.64% YTD), as the spread on the Merrill Lynch High Yield Index widened sharply from 1617 bps to 1988 bps during the month, hitting a new all-time high of 1992 bps mid month. Many managers have started to shift from their defensive view of credit as they are seeing attractive opportunities. The Hennessee Merger Arbitrage Index increased +0.36% in November (-2.47 % YTD), but is one of the best performing strategies this year. Despite the failed Rio Tinto takeover attempt by BHP, managers outperformed on a relative basis, largely due to the completion of the widely-held InBev-Anheuser Busch merger. The Hennessee Convertible Arbitrage Index declined -4.50% (-24.63% YTD). While the sell-off in converts slowed in November, funds suffered losses due to a widening of credit spreads, despite elevated volatility and declining interest rates.
“As Hennessee Group predicted in its October 8th and November 10th press releases, Europe continued to dramatically lower short term rates, lowering the ECB target to 2.00% in early December,” says Charles Gradante. “Now, Japan looks like it may enter the worst recession since World War II, with serious risk of contagion to the rest of Asia and the globe. The Bank of Japan must decrease rates in order to stimulate the economy. “
The Hennessee Global/Macro Index declined -2.11% in November (-20.41% YTD). International equities continued to decline in November with the MSCI EAFE Index declining -5.70% (-48.16% YTD). The Hennessee International Index declined -1.90% (-21.53% YTD) as managers maintained significant cash balances and benefited from a late month rally. Managers state that while it appears that the developed markets, including the U.S., Europe and Japan, appear to be heading into a recession, emerging markets are compelling as they are likely to account for the majority of world economic growth in 2009 and are trading at, or near, historically low levels. The Hennessee Macro Index advanced +1.23% for the month (+1.21% YTD). Managers profited from continued momentum trades in currencies, in ‘global recession trade’ where they are long duration bonds while short equities and credit, and from betting that short term interest rates would decline.
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