September 11, 2007 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, today announced that the Hennessee Hedge Fund Index declined –0.72% in August (+8.14% YTD), while the S&P 500 advanced +1.29% (+3.95% YTD), the Dow Jones Industrial Average increased +1.10% (+7.17% YTD), and the NASDAQ Composite Index rose +1.97% (+7.50% YTD). The Lehman Intermediate Government/ Corporate Bond Index advanced +1.21% (+3.65% YTD).
“It was generally a sub-par month for hedge funds, although losses were not nearly as heavy as many had speculated,” said E. Lee Hennessee, Managing Principal of Hennessee Group. “While losses were incurred in arbitrage, quantitative equity, and macro strategies, U.S. fundamentally driven long/short equity funds were marginally positive.”
The Hennessee Long/Short Equity Index advanced +0.08% in August (+8.28% YTD). The beginning of the month was especially difficult for most equity strategies as popular short positions in mortgage companies rose from an oversold condition, while long positions suffered with the overall market malaise. Many fundamentally driven equity managers also reported that their portfolios were negatively affected by the unwinding of quantitative equity portfolios.
“Given the weakness in housing, most equity managers are attempting to evaluate the effect on earnings growth for the second half of the year and 2008,” said Charles Gradante, Managing Principal of Hennessee Group. “Recognizing that $1.2 trillion of adjustable rate mortgages are expected to reset in 2007-2008, most managers believe earnings will slow the most in consumer focused industries, while companies levered to corporate spending should fare relatively well.”
The Hennessee Arbitrage/Event Driven Index declined –1.08% in August (+6.23% YTD). As a result of poor performance in quantitative equity strategies, many multi-strategy funds were forced to de-lever their portfolios throughout the month, causing weakness in many arbitrage strategies. Credit strategies fared the worst, with the Hennessee Distressed Index down –1.64% for the month (+7.57% YTD). Liquidity remained poor throughout the credit markets, as high yield credit spreads continued to widen and investors questioned the ability of levered companies to refinance even short-term commercial paper. The Hennessee Convertible Arbitrage Index declined –2.43% in August (+1.52% YTD). Rumors of forced sellers of convertibles created poor liquidity despite the increase in equity volatility, which is typically favorable for the strategy. Furthermore, losses were incurred on credit exposure, as spreads on credit default swaps did not widen as much as the cash market. Merger arbitrage was the lone strategy posting positive returns, as the Hennessee Merger Arbitrage Index advanced +0.88% (+8.74% MTD). Spreads on most LBO deals tightened after widening substantially the past few months, as very few deals have been called off despite the deteriorating financing conditions.
The Hennessee Global/Macro Index declined –1.87% in August (+9.92% YTD), as risk aversion in the U.S. finally set into the international equity markets, especially in Asia. International equity funds failed to outperform their counterparts in the U.S. as the Hennessee International Index declined –0.25% (+12.19%). Macro funds also posted losses as the Hennessee Macro Index declined –1.10% (+5.89% YTD). The global carry trade posted losses, as the Japanese yen strengthened rather substantially versus most major currencies. Bonds were stronger throughout the month on the flight to quality theme, concerns of a U.S. recession, and speculation that the Fed will ease on September 18. Gold prices rose as a result of the economic and financial market uncertainty.
“We believe that losses incurred in sub-prime mortgages will be fairly widespread,” continued Mr. Gradante. “While it’s quickly becoming apparent that European banks were large owners of sub-prime mortgage backed securities, it would not be surprising to see similar holdings among the Asian financial sector. This could prove troublesome for many banks in Asia, particularly China, which was already faced with high levels of delinquent domestic loans. In the U.S., money center banks’ use of the discount window is unusual and may indicate problems in the small and mid-size bank sector, as many have likely purchased less credit-worthy paper to compensate for unfavorable net interest margins. Further consolidation in the financial sector may be the end result.”
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.
