The Hennessee Hedge Fund Index declined by 5.52 per cent in October, only narrowly improving on the industry’s dismal record the previous month, and is now down by nearly 16 per cent over
The Hennessee Hedge Fund Index declined by 5.52 per cent in October, only narrowly improving on the industry’s dismal record the previous month, and is now down by nearly 16 per cent over the first 10 months of this year, according to Hennessee Group, a provider of industry data and adviser to hedge fund investors.
However, the firm’s co-founder and managing principal Charles Gradante says: ‘While the Hennessee Hedge Fund Index is down 15.73 per cent this year, it has outperformed the S&P 500 on a relative basis by almost 20 per cent. Hedge funds have worked to preserve capital in an extremely challenging market environment.
‘While September was challenging due to several extraordinary and unexpected events, managers were able to weather October’s volatility better given their reduced exposure. Although 2008 is on track to be the worst year ever for hedge funds, they have still managed to outperform on a relative basis.’
‘Massive deleveraging resulted in significant declines across the board, resulting in the worst month in history for most risk assets. While many managers are seeing very attractive investment opportunities, they are struggling to retain investors and their capital bases. Thus far, we have seen more funds freeze redemptions, utilise redemption gates, reduce fees, and liquidate than in the history of the hedge fund industry.’
The Hennessee Long/Short Equity Index declined 5.49 per cent in October and is down 14.31 per cent for the year so far. Managers were defensively positioned with significantly reduced exposures, but still suffered losses as equity markets declined substantially.
Losses were broad based as all sectors were down in double digits for the month. While the ban on short selling was lifted at the beginning of the month, a positive for hedge funds, losses on the long side of portfolios more than offset gains from hedges and short positions.
‘Heavy selling is distorting prices, as technicals and fear are overwhelming longer-term fundamentals,’ Gradante says. ‘This market dislocation is leading to opportunities to earn attractive unleveraged returns in various arbitrage areas including convertible arbitrage, merger arbitrage and distressed. Several managers are purchasing senior secured loans, where prices traded into the 60s, and in some cases, fell below the levels of unsecured bonds.’
The Hennessee Arbitrage/Event Driven Index fell by 4.70 per cent to bring year to date losses to 13.45 per cent. Despite a generally defensive posture on credit, the Hennessee Distressed Index declined 5.48 per cent, down 17.70 per cent in 2008, as the spread on the Merrill Lynch High Yield Index widened sharply from 1,096 to 1,617 basis points during the month.
The Hennessee Merger Arbitrage Index slipped by just 0.18 per cent in October and its loss for the year is only 0.86 per cent. Given the backdrop of volatility, illiquidity and frozen credit markets, confidence in mergers eroded and deal spreads, particularly on anything requiring financing, widened substantially.
The Hennessee Convertible Arbitrage Index plummeted 10.38 per cent to take its decline for the year to 21.34 per cent as convertible funds continued to experience their worst losses on record. Sharply widening spreads and secondary market cheapening made negative contributions. In addition, funds had to face higher funding costs, increasingly restrictive margin requirements, redemption-forced selling and continued deleveraging.
‘Europe was forced to lower short-term rates, which was profitable for macro managers,’ Gradante says. ‘Managers also made money long the US dollar as the liquidity-induced carry trades of the last few years continue to unwind rapidly.’
The Hennessee Global Macro Index declined 5.48 per cent in October to take losses for the year to17.68 per cent. International equities continued to decline sharply, with the MSCI EAFE Index falling 20.24 per cent during the month (45.02 per cent so far this year) as global markets faced deleveraging and a flight to quality.
The Hennessee International Index dropped 4.27 per cent, increasing its year to date decline to 19.79 per cent, although managers maintained significant cash balances and benefited from a late month rally.
The Hennessee Macro Index was the only strategy index to rise during October with 0.61 per cent, although it remains narrowly in negative territory for the year, down 0.29 per cent. Managers profited from a global recession trade, with long positions in duration bonds while short equities and credit, and benefited from positive momentum as the US dollar rallied sharply during the month.
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.
