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Hedge funds gain 2.21 per cent in May, says Hennessee

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Index provider and adviser to hedge fund investors Hennessee Group has reported that the Hennessee Hedge Fund Index gained 2.21 per cent in May, but remains fract

Index provider and adviser to hedge fund investors Hennessee Group has reported that the Hennessee Hedge Fund Index gained 2.21 per cent in May, but remains fractionally lower (0.10 per cent) than at the beginning of the year.

‘Hedge funds outperformed the overall markets in May, as managers were able to generate excess returns due to good stock selection in the Russell 2000 and Nasdaq markets,’ says the firm’s managing principal E Lee Hennessee. ‘Managers have started to increase portfolio gross exposures, but remain extremely concerned as to how deep and prolonged the US economic recession will be.’

The Hennessee Long/Short Equity Index was up 2.54 per cent in May as volatility declined and equities continued to advance, led by small and mid-cap stocks and the technology sector, but long/short funds remain down 0.76 per cent over the first five months of the year.

‘While the Bear Stearns rescue may have signalled a peak in the financial crisis, managers generally believe that that the full impact of the credit crisis has yet to be felt,’ says Charles Gradante, the other managing principal. ‘In addition, managers continue to sell out of the money covered calls as a way to lower position cost basis.

‘The outlook for convertible arbitrage has improved dramatically in recent months. After months of forced selling and deleveraging by multistrategy funds, conditions are improving as volatility has increased, credit spreads have widened, and valuations are cheap. As credit markets remain largely illiquid, more companies are going to the convertible window for financing, creating attractive terms for buyers.’

The Hennessee Arbitrage/Event Driven Index rose by 1.66 per cent in May and moved into positive territory – albeit by just 0.02 per cent – for the year so far. The firm says arbitrage and event-driven funds have been able to recoup the entirety of their losses from a very volatile first quarter. High-yield bond managers profited as credit spreads tightened from 6.9 per cent to 6.5 per cent over Treasuries.

The Hennessee Distressed Index rose 1.87 per cent in May, and is also just positive for 2008 with a gain of 0.11 per cent. Corporate defaults this year have already surpassed the total for the whole of 2007. Most credit managers expect the default rate to increase to 5 per cent and are holding high levels of cash that will be put to work as opportunities arise.

The Hennessee Merger Arbitrage Index increased by 2.04 per cent in May and is up by 1.86 per cent for the year to date. Merger spreads tightened as a result of reduced volatility in the equity markets and more accommodating M&A lending, while investor sentiment on the sector improved as the Clear Channel buyout came closer to completion. The Hennessee Convertible Arbitrage Index gained 1.28 per cent in May, although remaining down 0.28 per cent for the year, as credit-related gains were partially offset by volatility-related losses, as the VIX declined from 20.8 to 17.8.

‘Macro managers have closed out positions in gold as it failed to make new highs since gold hit USD1,000 in March,’ Gradante says. ‘They remain short the US market, with the belief that it will test the double bottom of 11,500 and 11,800 on the Dow Jones Industrial Average, and short the dollar against a long oil position, seeing USD150 per barrel of oil.’

The Hennessee Global/Macro Index rose by1.67 per cent in May, but remained down 0.18 per cent in 2008. International equities were up slightly, though lagging most US markets; the MSCI EAFE Index advanced 0.28 per cent but remains down by 4.79 per cent for the year to date. Returns were the strongest in emerging markets, particularly in Europe and Latin America.

Performance for international long/short equity funds was similar to that of the strategy in the US, with the Hennessee International Index gaining 2.48 per cent to reduce its year-to-date decline to 0.72 per cent. The Hennessee Macro Index rose 2.08 per cent for the month to reach a total gain of 5.40 per cent so far in 2008, making it the best performing strategy of the year. Commodities continued their recent surge, with oil prices rising above USD130 per barrel, up 30 per cent for the year, and natural gas to about USD12 per million BTU, a gain of 60 per cent in 2008.

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