January 9, 2007 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, today announced that the Hennessee Hedge Fund Index advanced +1.28% in December (+11.36% YTD), while the S&P 500 DRI advanced +1.40% (+15.81% YTD), the Dow Jones Industrial Average rose +1.97% (+16.29% YTD), and the NASDAQ Composite Index declined
-0.68% (+9.51% YTD). Bonds reversed course in December, as the Lehman Brothers Intermediate Government Corporate Bond Index declined -0.41%, although have generally exceeded expectations for the year (+4.07% YTD).
“Hedge funds under-performed the overall equity markets in 2006, as is expected when the markets have the type of strength they showed this year” said E. Lee Hennessee, Managing Principal of Hennessee Group LLC. “On a relative basis, it was a difficult year for most active equity strategies, as Lipper reported that only 19% of actively managed diversified equity mutual funds outperformed the S&P 500 for the year. Likewise, only 24% of funds in the Hennessee Long/Short Equity Index outperformed the S&P 500.”
The Hennessee Long/Short Equity Index advanced +1.06% in December (+11.23% YTD). Whereas the index outperformed the S&P 500 through the first half of the year, most funds were likely surprised by the strength of equities in the second half of the year. Many long/short equity funds trailed the market because of losses in short portfolios. Furthermore, for the first time since 1995, the S&P 500 only had one negative month for the year.
"The strength of the equity markets in 2006 was clearly a reflection of investors’ belief that the U.S. economy would make a soft landing and the ‘Goldilocks’ economy would continue,” said Charles Gradante, Managing Principal of Hennessee Group LLC. “Many hedge funds remain conservatively positioned due to a number of reasons, including the lengthy inversion of the yield curve, slowing GDP growth, and lower earnings expectations.”
The Hennessee Arbitrage/Event Driven Index increased +1.32% in December (+12.05 YTD), as returns reached double digits across most arbitrage strategies. The Hennessee Distressed Index posted a gain of +1.45% (+14.53% YTD). Most have been somewhat surprised by the strength of the credit markets, as spreads tightened substantially throughout the year in the face of record levels of debt issuance and higher levels of leverage across most industries. Convertible arbitrage funds were up +1.09% (+11.89% YTD) as a result of the better credit environment and an excellent new issuance calendar, although were negatively impacted by the continued decline in implied volatility. Merger arbitrage also was positive, as the Hennessee Merger Arbitrage Index advanced +1.46% (+12.90% YTD). According to Thomson Financial, worldwide merger and acquisition activity totaled $3.79 trillion, exceeding activity in 2005 by 40%. Acquisition activity has been especially strong by private equity buyers, as $738 billion of deals were consummated by private equity buyers in 2006, far surpassing the total of $325 billion in 2005.
“The common theme among arbitrage strategies has been the tremendous amount of liquidity across the financial markets,” said Mr. Gradante. “Evidence of this is seen in high yield credit spreads reaching 10-year lows, measures of implied volatility falling to all-time lows, and LBO activity hitting all-time highs.”
The Hennessee Global/Macro Index advanced +2.02% in December (+10.50% YTD). The Hennessee International Index advanced +1.01% (+12.00% YTD), as outsized returns for the year were generated in Europe, Latin America, and developing Asia equity markets. Macro funds also experienced positive performance in December, advancing +1.19%, although have generally been laggards for the year (+4.76% YTD).
“Macro managers finally started to make money on their short positions in the 10 Year Treasury in December, after consistently losing on the trade for most of 2006,” continued Mr. Gradante. “In general, it was a disappointing year for macro managers given the fact that the U.S. dollar weakened 10% versus the Euro and gold increased +23% to $636 per ounce as expected.”
About the Hennessee Group LLC
Hennessee Group LLC is a Registered Investment Adviser that consults direct investors in hedge funds on asset allocation, manager selection, and ongoing monitoring of hedge fund managers. Hennessee Group LLC is not a tracker of hedge funds. The Hennessee Hedge Fund Indices® are for the sole purpose of benchmarking individual hedge fund manager performance. The Hennessee Group does not sell a hedge fund-of-funds product nor does it market individual hedge fund managers. For additional Hennessee Group Press Releases, please visit the Hennessee Group’s website. The Hennessee Group also publishes the Hennessee Hedge Fund Review monthly, which provides a comprehensive hedge fund performance review, statistics, and market analysis; all of which is value added to hedge fund managers and investors alike.
Description of Hennessee Hedge Fund Indices®
The Hennessee Hedge Fund Indices® are calculated from performance data supplied by a diversified group of over 1,000 hedge funds monitored by the Hennessee Group LLC. The Hennessee Hedge Fund Index is an equally weighted average of the funds in the Hennessee Hedge Fund Indices®. The funds in the Hennessee Hedge Fund Index are derived from the Hennessee Group’s database of over 3,500 hedge funds and are net of fees and unaudited. Past performance is no guarantee of future returns. ALL RIGHTS RESERVED. This material is for general information only and is not an offer or solicitation to buy or sell any security including any interest in a hedge fund.
