Hennessee Group, an adviser to hedge fund investors and index provider, has reported that the Hennessee Hedge Fund Index was up by 2.26 per cent in September and by 10.16 per cent for the first nine months of the year.

'Hedge funds experienced yet another good month in September, as liquidity in the market improved allowing most strategies to post positive returns,' says managing principal E. Lee Hennessee. 'The year is shaping up to be one of the best years for long/short equity strategies in quite a while, although arbitrage strategies have faced some difficulties.'

The Hennessee Long/Short Equity Index advanced 2.36 per cent in September (10.53 per cent YTD). After reaching a low in mid-August, US equity markets have posted an impressive rally, with the Dow rallying more than 8 per cent between August 16 and the end of September.

Long/short equity strategies have improved in 2007 relative to previous years, Hennessee says, because there has been more differentiation between sectors by comparison with each of the previous four years. Many funds have reported positive results in short portfolios for the year, despite impressive equity market returns.

'While equity markets have quickly rebounded to new highs, credit markets have failed to recover the entirety of losses suffered over the summer,' says Charles Gradante, the firm's other managing principal. 'This may be indicative of fundamental problems that the equity markets are overlooking. Typically, problems in corporate credit have resulted in losses in equities, as happened in 1990 and 2002.'

The Hennessee Arbitrage/Event Driven Index rose 1.19 per cent in September (7.10 per cent YTD). While credit strategies posted positive returns, they failed to generate the impressive returns of equity strategies, as the credit markets continued to absorb the overhang of debt issuance associated with leveraged buyout activity. The Hennessee Distressed Index was up 0.61 per cent for the month (7.75 per cent YTD).

Convertible performance improved after a sell-off during the previous three months, as the Hennessee Convertible Arbitrage Index advanced 1.80 per cent in September (3.77 per cent YTD).

Merger arbitrage also continued to recover after difficulties throughout the summer, as the Hennessee Merger Arbitrage Index advanced 1.26 per cent (9.22 per cent YTD). Spreads on most leveraged buyout deals tightened, as the financing environment began to improve.
 
The Hennessee Global/Macro Index advanced 3.04 per cent in September (12.93 per cent YTD), as global equity markets, especially emerging markets, posted gains. International equity funds outperformed their counterparts in the US with the Hennessee International Index rising by 4.23 per cent (16.06 per cent).

Macro funds also posted solid gains with the Hennessee Macro Index up 4.19 per cent (10.06 per cent YTD). The dollar declined against most currencies, while gold rose 11 per cent to end at USD735 per ounce and crude oil reached USD83 per barrel during the month. The yen carry trade again posted gains as the yen fell against most currencies, with the exception of the dollar, and risk premiums declined in most asset classes.
 
'The strong economic growth outside the US, particularly in Asia, is having a pronounced effect on commodity prices,' Gradante says. 'The inflationary effect of higher commodity prices coupled with the weakness in housing, consumer spending, and the dollar is increasing the risk of a stagflation scenario. Furthermore, gold's rally from USD650 in August to USD735 in September is a leading indicator of inflationary forces.'
 
Hennessee Group is a financial adviser that offers consulting services to direct investors in hedge funds on asset allocation, manager selection and ongoing monitoring of managers. The Hennessee Hedge Fund Indices, which are calculated solely for benchmarking individual hedge fund manager performance, are calculated from performance data reported to Hennessee by a diversified group of more than 1,000 hedge funds. The Hennessee Hedge Fund Index is an equally weighted average of the funds in the indices.


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