Hennessee Group LLC, estimates that while most global equity markets have declined more than -20% from their peak in October 2007, the Hennessee Long/Short Equity Index has increased +0.15% over the same period.
The latest research data highlighted a trend in the hedge fund industry that money managers, in an environment of increasing volatility and uncertainty, have successfully reduced their risk appetite and reallocated investments to cash and less risky assets. Hennessee Group’s research indicates that the average net exposure of long/short equity hedge funds decreased by -16% over the past year, from +52% at the end of the second quarter 2007 to +36% in the second quarter of 2008. The tightening of net exposures over the last year was largely due to managers’ trimming of margin and long portfolios, as the average long portfolio declined -21% from +114% (Q2 2007) to +92% (Q2 2008). The short positions were only trimmed by -5% from -62% (Q2 2007) to -57% (Q2 2008). These portfolio adjustments reflected negative market bias by managers.
“Hedge funds have maneuvered long, short, and cash investments to minimize losses and protect capital in a particularly challenging bear market,” says Charles Gradante, managing principal of Hennessee Group LLC. “We continue to see evidence of alpha generation as a result of portfolio construction and adjustments that have insulated hedge funds from the current market downturn.”
“Currently, money managers are less willing to choose a market direction and instead prefer to maintain cash positions (with the lowest net exposure since 2003) in preparation for improved investment opportunities,” says Gradante.