Hedge funds followed by the Hennessee Hedge Fund Advisory Group produced a negative return of -1.30% in September, says the consultancy. But they still did better than the markets, and short-biased hedge funds – unsurprisingly – were up.
Though the Hennessee hedge fund universe was down for the month, their performance outpaced the broad markets as the S&P 500 Index fell by -10.87%, the Dow Jones Industrial Average fell -12.37% and the Nasdaq Composite Index, which fell another -10.86%. Year-to-date, hedge funds are down -5.52%, far better than the overall dismal performance of the US equity markets, as the S&P 500 is down -28.23%, the Dow Jones Industrial Average is down -24.24%, and the Nasdaq is down a staggering -39.90%. In addition, Lipper Mutual Funds are down -24.06% year-to-date.
September was the worst single month decline for all three broad market indices this year. In the current market environment of falling stock prices and high volatility, Short Biased hedge fund managers outperformed all other styles as they posted a +4.59% gain for the month of September. Short Biased continues to be the best performing style in 2002 with a +17.91% return YTD. The second best performing were Convertible Arbitrage managers, with a +1.33% return, bringing their YTD to +3.59%, followed by Regulation D managers, who posted a +0.68% return (-2.83% YTD.)
On the downside, Latin America exposed its volatile nature once again as it went from the best performing strategy in August to the worst performing strategy in September, with a -11.96% drop for the month. This brings its YTD figure to -22.82%, the worst performing hedge strategy. Healthcare/Biotech was the second worst performing style in September, posting a -4.54% return, bringing its YTD to -19.53%, and Value hedge fund managers came in third worst at -3.00 (-6.42 % YTD.)
“Although hedge fund managers, as a group, have done a great job protecting principal, I am concerned that some hedge fund managers are not positioned for deflation. Right now, valuations are not as important as pricing power,” says Charles Gradante, Managing Principal of Hennessee Group LLC.
As markets sold off across the board, Short Biased managers were well positioned to profit. Spurred by the increasing possibility of war with Iraq and stagnant, if not declining, corporate profits, consumer confidence continued its downward spiral, adding to the falling stock prices. To make matters worse, a Senior Vice-President at the Dallas Federal Reserve Bank voiced that current price stability could be followed by price deflation in the future. Volatility also contributed to this month’s losses, but aided Convertible Arbitrage hedge fund managers. Unlike previous months, this volatility was not accompanied by deterioration in credits, hence creating opportunities for managers to profit from trading.
Latin America’s woes were attributed mainly to the pending Brazilian Presidential election, which currently has the Worker’s Party candidate Luiz da Silva as the likely winner. Additionally, many in Argentina estimated the GDP contraction to be anywhere from 12%-15% in the second quarter. The IMF stated that the unprecedented contraction and fall of output are twice that experienced during the Great Depression of the 1930s, but still remained steadfast on its position not to bail out the economy. Both Healthcare/Biotech and Value managers have been hesitant to go short at these low stock prices, causing a drawdown in their performance.