Hennessee Warns That Hedge Funds Are Under-Reacting To Deflation

Hedge fund investment consultants Hennessee today announced that hedge funds in the Hennessee Hedge Fund Index produced a positive return of +0.91% in October. However, this means they under performed the S&P 500 Index (+8.84%), the Dow Jones Industrial Average

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Hedge fund investment consultants Hennessee today announced that hedge funds in the Hennessee Hedge Fund Index produced a positive return of +0.91% in October. However, this means they under-performed the S&P 500 Index (+8.84%), the Dow Jones Industrial Average (+10.60%) and the Nasdaq Composite Index (+13.45%).

However, year-to-date, hedge funds (-4.80%) have still done better than the overall performance of the US equity markets, with the S&P 500 down -21.89%, the Dow Jones Industrial Average down -16.21%, and the Nasdaq down -31.81%. In addition, Lipper Mutual Funds are down -20.08% year-to-date.

“Equity hedge fund managers were up only fractionally in October, consistent with their low net long exposure to the stock market,” says Charles Gradante, Managing Principal of Hennessee Group LLC. “However, the Republican sweep on election day gave many managers good reason to add to their equity exposure since President Bush’s fiscal stimulus package will likely get passed with ease.”

Hennessee says October continued to exhibit the volatility in the market as Latin American managers continued their streak as being either the best or worst performing strategy. Latin American managers had the best performance in October with a +7.88% return as the newly elected President da Silva of Brazil softened his leftist stance. Healthcare/Biotech managers came in a distant second with a +2.88% return as strong earnings were announced and all the profitable biotech companies’ beat Wall Street earnings expectations. The third best performing style was Technology with an October return of +2.72%. Technology returns picked up due to a sector rally spearheaded by Microsoft as it announced that it would beat earnings estimates.

“Though S&P 500 earnings in the third quarter were generally better than expected, hedge fund managers continue to believe it continues to be a trader’s market, not an investor’s market,” Gradante concludes.

On the downside, High Yield was the worst performer for the month of October with a -2.93% drop, seeing as high yield bonds continued to trade down due to imbalances between supply and demand. Pacific Rim was the second worst performing style in October, posting a -1.90% return, mainly caused by Japan’s weak banking reform plan frustrating investors. Europe hedge fund managers came in third worst at -1.81% as the reluctance of the European Union’s Central Bank to lower interest rates caused investors to back off the market.

“The Hennessee Group continues to be concerned as to how hedge funds managers reflect the growing economic deflationary forces in their stock picking. The (GDP) price index grew just 0.8% year-over-year in the third quarter of 2002; the lowest rate since the second quarter of 1950,” says Gradante.

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