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Hedge funds advance in June despite equity market dip, says Hennessee

Hedge funds gained in average nearly 1 per cent last month despite an equity market dip that saw all three of the best known US stock market indices in decline for the month, according to hedge fund adviser and research and index provider Hennessee Group.

The Hennessee Hedge Fund Index rose by 0.88 per cent in June, the firm reports, compared with declines of 1.78 per cent for the S&P 500, 1.61 per cent for the Dow Jones Industrial Average and 0.05 per cent for the Nasdaq Composite Index.

The Hennessee index has also outperformed the main market indices over the first six months of this year with a return of 8.71 per cent, compared with 6.02 per cent for the S&P 500, 7.58 per cent for the DJIA and 7.78 per cent for the Nasdaq Composite.

'Despite significant losses by several funds focusing on mortgage-backed securities, it was generally a very good month for hedge funds,' says E. Lee Hennessee, one of the firm's joint managing principals. 'Many long/short equity funds actually benefited from the collapse in sub-prime mortgages via their short exposure to lenders and ABX indices.'
The Hennessee Long/Short Equity Index rose by 0.84 per cent in June and is up 8.43 per cent for the year as stocks were off due to rising interest rates and concerns about the mortgage and corporate bond markets.

Long/short equity funds performed well largely due to the excellent performance of short portfolios focused on housing and mortgage deterioration. Indices of sub-prime mortgage backed securities declined across the board, with lower-rated tranches falling by as much as 20 per cent during the month.
'Hedge fund managers were focused on the 10-year Treasury yield when it hit 5.26 per cent in mid-June,' says co-managing principal Charles Gradante. 'Nonetheless, most believe that equities still remain attractive relative to bonds. Since 1989, the S&P 500 earnings yield has averaged 0.7 per cent below the 10-year Treasury yield. Today, the S&P yield is 0.8 per cent above the 10-year Treasury.'
The Hennessee Arbitrage/Event Driven Index increased 0.19 per cent in June to reach 7.61 per cent so far in 2007, as it was a relatively difficult period for most arbitrage strategies due to widening high-yield corporate credit spreads. The spread on the Merrill Lynch High Yield Index widened from 2.6 per cent to 2.9 per cent over the 10-year Treasury as bond investors realized that they were not being compensated for the amount of risk they were assuming in the form of more leveraged balance sheets.

The Hennessee Distressed Index declined by 0.32 per cent over the month but remains ahead by a healthy 8.90 per cent for the year. While merger and acquisition activity remained robust in June, the Hennessee Merger Arbitrage Index declined by 0.20 per cent as merger spreads widened following concerns about the ability of several leveraged buyouts to secure debt financing. Nevertheless, the Merger Arbitrage Index remains up 9.78 per cent for the year. The Hennessee Convertible Arbitrage Index was up by 0.21 per cent in June and 5.01 per cent for the first half-year as credit-related losses were offset by gains from an increase in implied volatility.
The Hennessee Global Macro Index advanced 1.73 per cent in June and was up 10.16 per cent for the year. International equities were sold off alongside the US equity markets, although the Hennessee International Index increased by 0.96 per cent for the month and is now ahead by 10.68 per cent in 2007.

The Hennessee Macro Index rose by a robust 2.09 per cent in June to build its gains for the first six months of the year to 7.51 per cent. Many managers benefited from higher Treasury yields and the continued decline in the Japanese yen, which hit an all-time low against the euro, a 15-year low versus sterling, and a five-year low versus the US dollar. The yield on the 10-year Treasury note rose from 4.90 per cent to 5.03 per cent after reaching a high of 5.26 per cent at mid-month.
'The carry trade is coming back strongly as evidenced by the yen hitting record lows versus most major currencies,' Gradante says. 'The carry trade at the expense of the yen remains an over-riding theme by most macro managers.'

As a registered investment adviser, Hennessee Group advises direct investors in hedge funds on asset allocation, manager selection, and ongoing monitoring of managers. The firm calculates the Hennessee Hedge Fund Indices from performance data reported 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, derived from the group's database of more than 3,500 hedge funds, and is net of fees and unaudited.

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