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Hennessee Group says hedge funds fell 1.95 per cent in July

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The Hennessee Hedge Fund Index declined by 1.95 per cent in July and is now down by 3.23 per cent so far in 2008, according to Hennessee Group, a provider of industry data and adviser to h

The Hennessee Hedge Fund Index declined by 1.95 per cent in July and is now down by 3.23 per cent so far in 2008, according to Hennessee Group, a provider of industry data and adviser to hedge fund investors, after hedge funds underperformed US equity markets last month as a result of a sharp reversal in key themes.

The Hennessee index lagged the S&P 500, which declined by 0.99 per cent in July, as well as the Dow Jones Industrial Average, which gained 0.25 per cent, and the Nasdaq Composite Index, which rose by 1.42 per cent. However, the three equity indices are down by 13.71, 14.22 and 12.30 per cent respectively over the first seven months of the year.

‘Hedge funds underperformed in July due to sharp reversals in the equity markets during the second half of the month,’ says E. Lee Hennessee, managing principal of Hennessee Group. ‘One of the most common and profitable themes among managers for the first half of the year – short financials and long energy – experienced a very sharp reversal.’

The Hennessee Long/Short Equity Index declined by 1.31 per cent and is now down by 2.89 per cent for the year. Many managers were short financials and posted losses as the sector rallied strongly in the second half of July, with the S&P Banking Index soaring 48.68 per cent from its low point in mid-month.

In addition, managers who were long energy suffered losses as the S&P Energy Sector dropped by 14.00 per cent. One of the top performing equity strategies in July was health care and biotechnology hedge funds, which on average gained significantly from a flurry of merger and acquisition activity and renewed interest in the sector.

‘Equity managers remain very cautious and entered July with the lowest net exposure in 4 years,’ said Charles Gradante, the firm’s other managing principal. ‘Hedge fund managers are very cautious due to US housing declines, poor economic data and higher commodity prices. Most are unwilling to take a directional bet and are maintaining cash positions in preparation for better future investment opportunities.’

The Hennessee Arbitrage/Event Driven Index declined by 1.48 per cent and is down 2.26 per cent so far this year. Most hedge fund managers were hurt as credit spreads widened from 7.53 per cent to 8.00 per cent over Treasuries. The Hennessee Distressed Index declined 1.12 per cent in July to end the month down 2.33 per cent this year due to renewed credit concerns and wider spreads.

The Hennessee Merger Arbitrage Index rose 0.70 per cent for a year-to-date increase of 2.36 per cent. Managers say conditions are becoming more attractive as spreads on deals remain relatively wide due to credit and stock market concerns, but the quality of deals is improving. Most expect deal activity to continue, driven by strategic buyers looking to purchase assets at depressed prices.

The Hennessee Convertible Arbitrage Index fell 2.33 per cent in July, accounting for most of the 2.66 per cent decline for the year. Spreads and cheapening of the secondary market caused losses, which were partially offset by gains in volatility, as the VIX hit a high of 28.5 in mid-month.

‘Given a global economic slowdown, the run up in commodities was long in the tooth and most were expecting a pull back at some point in the near term,’ Gradante says. ‘However, most believe that this is a short term correction in the long term bull trend for commodities, which is still intact but with less momentum. Many believe that the demand for agricultural commodities and oil may continue to outweigh supply for many years to come.’

The Hennessee Global/Macro Index fell 3.03 per cent in July and is now down 5.01 per cent for the year after suffering the strategy’s worst month since January. International equities continued to decline in July with the MSCI EAFE Index falling 3.28 per cent, bringing its fall in 2008 to 15.57 per cent.

The performance of international long/short equity funds was worse than that of US funds, with the Hennessee International Index slipping 4.13 per cent for the month and 6.40 per cent so far this year. Emerging markets, especially Latin America and emerging Europe, had a particularly adverse impact on international portfolios.

The Hennessee Macro Index declined 1.82 per cent in July and is now down 4.04 per cent in 2008. Managers suffered losses due to a sharp reversal in commodities, as the Reuters/Jefferies CRB index of 19 commodities plunged 10 per cent, the index’s biggest monthly loss for 28 years. Although many investors had expected a correction in oil prices, they were surprised by the 20 per cent decline by early August from the record USD147.27 a barrel price on July 11.

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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