January 10, 2008 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, today announced that the Hennessee Hedge Fund Index advanced +11.64% in 2007, while the S&P 500 increased +3.56%, the Dow Jones Industrial Average rose +6.42%, and the NASDAQ Composite Index advanced +9.80%. The Lehman Aggregate Bond Index advanced +6.96% YTD. All 23 of the Hennessee Hedge Fund Sub-Indices outperformed the S&P 500 for the year.
“Despite several high profile hedge fund failures, performance for the industry as a whole was excellent in 2007,” said E. Lee Hennessee, Managing Principal of Hennessee Group. “The Hennessee Hedge Fund Index outperformed the S&P 500 by over 800 basis points, the best relative return since 2002.”
The Hennessee Long/Short Equity Index advanced +12.08% for the year. After suffering four consecutive years of losses in short portfolios from 2003-2006, most long/short equity funds were able to generate a profit via short selling in 2007, despite the overall market’s rise. The financial sector provided the most opportunities on the short side due to the collapse of the housing and sub-prime mortgage markets. Many funds were also able to generate outsized returns by purchasing credit default swaps on sub-prime mortgage backed securities, which fell substantially as a result of increased mortgage delinquencies. The year also witnessed a return of growth stock investing, led by technology, as growth funds outperformed value funds.
“The equity markets are pricing in substantial losses among financial institutions due to their holdings in mortgage backed securities and collateralized debt obligations,” said Mr. Gradante, Managing Principal of Hennessee Group. “However, we remain concerned that the amount of losses generated due to writing of insurance on mortgage backed securities in the form of credit default swaps is relatively unknown, which could test the solvency of a major bank.”
The Hennessee Arbitrage/Event Driven Index advanced +7.78% in 2007, as volatility in the fixed income and credit markets posed difficulties for arbitrage strategies. The Hennessee Distressed Index rose +8.87% for the year, as most credit funds fared relatively well despite the widening of high yield credit spreads from 2.9% to 5.8% over Treasuries. According to Moody’s, the default rate on junk bonds fell to a 26 year low of 1.0% in 2007, although is expected to increase to 4.0% in 2008. The Hennessee Convertible Arbitrage Index advanced +4.36% in 2007. Convertible arbitrage had a difficult year, as gains generated by an increase in implied volatility were offset by credit related losses. The Hennessee Merger Arbitrage Index advanced +11.58% for the year. Despite widening merger spreads during the summer due to concerns about the ability to finance leveraged buyouts, merger arbitrage funds had a relatively good year, as worldwide merger and acquisition activity reached an all time record of $4.8 trillion. Finally, both fixed income, especially mortgage backed strategies, and quantitative equity strategies, such as statistical arbitrage, had difficult years.
“Following a standout year in 2006, Asian equity markets (ex-Japan) again provided the best global returns in 2007,” continued Mr. Gradante. “However, we’re seeing evidence of heightened levels of speculation and excessive valuations in China, coupled with increasing inflation, which was reported to be higher than 6%. We believe that 2008 could be an excellent year for well-hedged long/short equity funds in Asia, as there may be an opportunity to make substantial profits on both sides of portfolios, similar to the U.S. in 2000 following the collapse of the tech bubble.”
The Hennessee Global/Macro Index advanced +15.59% for the year. International equity markets were stronger than those in the U.S., led by Asia. The Hennessee International Index advanced +20.02% for the year. The Chinese equity markets were reminiscent of the NASDAQ in 1999, as the Shanghai Composite Index increased +97% for the year, following a return of +130% in 2006. Japan was the exception in Asia, as the Nikkei declined -11%. After getting off to a slow start, macro funds ended the year well, as the Hennessee Macro Index advanced +15.13% for the year. Profitable themes for macro managers include short positions in the U.S. dollar and long positions in oil and gold. Oil reached an all-time high, approaching $100 per barrel, while gold eclipsed $800 per ounce.
“Going into 2008, stagflation will be the Fed's biggest juggling act, as the Fed has little control over BRIC consumption and the U.S. economy will clearly have a significant decline," concluded Mr. Gradante.
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.