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Hedge funds decline 0.64 per cent in June but survive the tsunami, says Hennessee

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The Hennessee Hedge Fund Index declined by 0.64 per cent in June and is down by 0.85 per cent for the first six months of this year, according to Hennessee Group, a provider of industry da

The Hennessee Hedge Fund Index declined by 0.64 per cent in June and is down by 0.85 per cent for the first six months of this year, according to Hennessee Group, a provider of industry data and adviser to hedge fund investors.
 
‘Hedge funds preserved capital as the equity markets declined sharply in June,’ says E. Lee Hennessee, the firm’s co-managing principal. ‘Many managers struggled in the first quarter as they were whipsawed by huge swings in volatility. However, during the second quarter, managers performed better as they maintained well-hedged, tighter exposures.’
 
The Hennessee Long/Short Equity Index fell by 0.35 per cent during the month and lost 1.07 per cent in the first half, despite the equity markets selling off sharply. Managers were able to outperform the broad market due to conservative positioning, with low gross and net exposure.

In addition, managers were able to profit from short positions in the financial sector, which continued to decline in June. With the broad indices flirting with official bear market levels after falling by more than 20 per cent from their October 2007 highs, managers remain extremely cautious and are hesitant to put money to work.
 
‘Managers who attempted to catch a falling knife were hurt badly in June as the equity markets declined significantly,’ says Charles Gradante, Hennessee Group’s other managing principal.

‘While some had believed the rebound in April was a sign that markets had stabilised from the credit crisis, it is now obvious that these markets are still very vulnerable as they fall through key support levels. Most believe that the market will not turn around until there is some improvement in the housing market, energy prices and financial sector. If the Dow doesn’t hold at 11,200, the next support will be at 10,600.’
 
The Hennessee Arbitrage/Event Driven Index declined by a bare 0.07 per cent in June and is down just 0.04 per cent in 2008. Last month some managers were hurt, Hennessee says, as credit spreads widened significantly from 6.57 to 7.53 per cent over Treasuries.

The Hennessee Distressed Index rose by 1.17 per cent and is up 1.73 per cent for the first half due to a positive carry on portfolios and some investment-specific events that drove positive performance.

The Hennessee Merger Arbitrage Index declined fell by 1.43 per cent in June but retained a 0.20 per cent year to date gain as merger spreads widened in tandem with increasing volatility in the equity markets.

The Hennessee Convertible Arbitrage Index declined by 0.16 per cent for the month and is down 0.53 per cent in 2008. Credit-related losses were more than offset by gains due to an increase in volatility, as the VIX volatility index increased from 17.8 to 24.0. ‘Several managers have stated that convertibles are at their cheapest in five years,’ Gradante says.
 
He adds: ‘The commodities boom has helped propel performance of macro managers thus far this year. However, given a global economic slowdown, the run-up in commodities may be long in the tooth.

‘Macro managers are positioned to take advantage of a near-term bull market correction in commodities. However, most believe the long-term bull trend is still intact but with less momentum. In addition, macro mangers moved out of most emerging markets as USD5bn of mutual fund assets in those markets were liquidated in June.’
 
The Hennessee Global/Macro Index declined by 1.56 per cent in June and is now down 1.89 per cent for the year. International equities were down significantly, with the US, Europe and Asia all down by high single-digit figures.

The performance of international long/short equity funds was a bit worse than that of their US counterparts, as the Hennessee International Index declined 2.13 per cent in June, leaving it down 1.57 per cent for the first half.

The Hennessee Macro Index gained 2.21 per cent for the month and is up by 7.26 per cent in 2008, making it the best performing strategy this year. Commodities continued their recent surge, helping to drive gains for macro managers, as the CRB Index gained 9.6 per cent in June.

The Hennessee Hedge Fund Indices are calculated from performance data reported to the Hennessee Group by a diversified group of more than 1,000 hedge funds. The Hennessee Hedge Fund Index is an equally-weighted net of fees and unaudited average of the funds in the indices, derived from the group’s database of more than 3,500 hedge funds.

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