December 10, 2007 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, today announced that the Hennessee Hedge Fund Index declined -1.58% in November (+11.94% YTD), while the S&P 500 declined -4.40% (+4.45% YTD), the Dow Jones Industrial Average fell -4.01% (+7.28% YTD), and the NASDAQ Composite Index declined –6.93% (+10.17% YTD). The Lehman Aggregate Bond Index advanced +1.80% (+6.66% YTD).
“November was a good example of the value that hedge funds provide to investors, as losses by hedge funds are generally less than those of the overall market in periods of turbulence,” said E. Lee Hennessee, Managing Principal of Hennessee Group. “The increase in equity volatility has provided good opportunities for long/short equity strategies this year, although arbitrage strategies have not fared as well.”
The Hennessee Long/Short Equity Index declined -1.56% in November (+12.57% YTD). November marked the worst monthly performance for most of the equity indices since December 2002. U.S. equities posted steep declines during the month, with losses limited by a late month rally. Financial companies continued to lag, with the S&P Financial Index falling -8.1% in November (-16.0% YTD) as losses continued to mount due to exposure to mortgage-backed securities and CDOs. The majority of the gains for long/short equity funds were made on the short side in November, as the environment for short selling continued to improve.
“Equities are pricing in a reasonable likelihood of a U.S. recession in 2008, as the financial and consumer sectors have been the weakest performers for the year,” said Charles Gradante, Managing Principal of Hennessee Group. “With valuations seemingly fairly valued at 15 times 2008 operating earnings, most believe that equity prices will follow earnings growth next year. The consensus is currently expecting double digit earnings growth in 2008, although this seems rather inflated due to large write downs by banks this year.”
The Hennessee Arbitrage/Event Driven Index declined -1.61% in November (+7.56% YTD), as most arbitrage strategies posted losses and many funds reduced risk by further de-levering portfolios. The Hennessee Distressed Index declined –1.21% in November (+9.37% YTD). Credit strategies experienced a difficult month as high yield credit spreads widened from 4.3% to 5.4% over the 10 Year Treasury. Moody’s predicts that the default rate on high yield bonds will increase to greater than 4% in 2008, up from 1% today. Merger arbitrage also experienced some difficulty, as the Hennessee Merger Arbitrage Index declined –1.69% (+13.26%). While worldwide merger and acquisition activity has set an all time-time record for the year, eclipsing $4.2 trillion through the end of November, activity has slowed substantially in recent months. Negative performance in November was primarily driven by the overall decline in equities and the fact that several LBO deals finally broke. Convertible arbitrage also experienced a difficult month, as the Hennessee Convertible Arbitrage Index declined –2.04% (+3.01% YTD). While volatility increased, credit spreads widened substantially. Quantitative strategies such as statistical arbitrage also posted losses, continuing the declines experienced over the summer.
The Hennessee Global/Macro Index declined -1.68% in November (+15.84% YTD). Whereas the decline in equities earlier in the year was mostly limited to the U.S., equities fell globally in November, led by China, as investors began to doubt the lack of correlation between the U.S. and China. Concerns about the U.S. economy caused a large rally in U.S. Treasuries and declines in the U.S. dollar and most commodities. The dollar again reached a record low against the euro, while the strength of the yen and the associated unwinding of the yen carry trade may have been a further cause for the decline in many asset classes.
“Pressure continues to build on China to revalue its currency,” continued Mr. Gradante. “We believe that it is now in their best interests to do so, as inflation was recently reported at 6.5% in China. Furthermore, the U.S. economy is clearly slowing and an appreciation in the yuan would make the U.S. more competitive.”
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 reported to the Hennessee Group by a diversified group of over 1,000 hedge funds. 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.
