Short Selling Causes Hedge Funds To Suffer Worst Month In Over A Decade

According to Hennessee Group LLC, an adviser to hedge fund investors, hedge funds fell by their highest margins in a decade in September, although they still outperformed the S&P 500 and the NASDAQ Composite
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According to Hennessee Group LLC, an adviser to hedge fund investors, hedge funds fell by their highest margins in a decade in September, although they still outperformed the S&P 500 and the NASDAQ Composite.

The Hennessee Hedge Fund Index declined -6.24% in September (-10.28% YTD), while the S&P 500 declined -9.08% (-20.57% YTD), the Dow Jones Industrial Average declined -5.78% (-18.20% YTD), and the NASDAQ Composite Index declined -12.0% (-21.51% YTD). Bonds declined, as the Lehman Aggregate Bond Index declined -1.34% (+0.64% YTD).

“Despite being defensively positioned, September was the worst month for hedge funds in over a decade” says Charles Gradante, co-founder of Hennessee Group. “The ban on short selling caused significant losses across most strategies and required funds to alter their trading models.”

“Hedge funds have outperformed on a relative basis year to date. However, given their reduced exposures over the first 9 months of the year, I would expect hedge funds to be down less,” says Lee Hennessee, managing principal of Hennessee Group. “Violent theme reversals, extreme volatility and unpredictable intervention have contributed to negative performance.”

The Hennessee Long/Short Equity Index declined -5.86% in September (-9.31% YTD). The majority of losses came in the last two weeks of the month as the government decided to restrict short selling and liquidity disappeared. The intervention created a massive short squeeze, while long positions were pushed lower by de-leveraging/liquidity concerns. Managers have further reduced net and gross exposure as the markets continue to respond to fear and liquidity, rather than fundamentals, according to Hennessee.

“Convertible arbitrage portfolios faced massive mark to market losses” says Gradante. “The short-selling ban, financial defaults and forced selling resulted in a sharp decline in prices. However, the dislocation has created convertible opportunities as attractive as they have ever been.”

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