Hedge Funds Advance +1.01% in March

Date: Wednesday, April 11, 2007
Author: Hennessee Group LLC

Hennessee Group LLC, an adviser to hedge fund investors, yesterday announced that the Hennessee Hedge Fund Index advanced +1.01% in March (+3.34% YTD), while the S&P 500 rose +1.00% (+0.19% YTD), the Dow Jones Industrial Average increased +0.70% (-0.88% YTD), and the NASDAQ Composite Index advanced +0.23% (+0.26% YTD).  Bonds lagged in March, as the Lehman Intermediate Government Corporate Bond Index advanced +0.17% (+1.59% YTD). 

“The first quarter was a relatively successful quarter for most hedge funds, as the increase in volatility allowed them to outperform equities on a relative basis,” said E. Lee Hennessee, Managing Principal of Hennessee Group LLC.  “Hennessee Group believes that a slowdown in the economy should be good for most hedge fund strategies.”

The Hennessee Long/Short Equity Index advanced +0.80% in March (+3.04% YTD).  Equity markets rallied following an early month correction, although failed to set new highs previously set in February.  With relatively low net exposures, most managers rebuilt equity portfolios as volatility declined toward month end.

“While shorts in the sub-prime mortgage sector worked well, the environment for short selling continues to be very difficult across the broader market”said Charles Gradante, Managing Principal of Hennessee Group LLC.  “Most managers believe that wider credit spreads may be a catalyst for improved performance of short portfolios because the leveraged buyout boom is partially dependent on the availability of inexpensive financing.”

The Hennessee Arbitrage/Event Driven Index increased +1.01% in March (+4.08% YTD), as all major strategies again posted positive returns.  The Hennessee Distressed Index posted a gain of +1.38% (+4.56% YTD), as corporate bond spreads again continued to tighten, defying the expectations of most investors.  Convertible arbitrage funds were up +0.49% (+3.19% YTD).  New issuance of convertible bonds was the third most active month in history, although volatility fell after spiking in late February and early March.  Merger arbitrage experienced yet another positive month, as the Hennessee Merger Arbitrage Index advanced +0.10% (+3.48% YTD).  $1.1 trillion of global merger and acquisition activity was consummated in the first quarter, only the third quarter in history in which volume has exceeded $1 trillion.  A large portion of the activity was a result of leveraged buyouts, which continued at a record pace in March.

“There has been some speculation that a fixed income or mortgage backed hedge fund could run into trouble given the difficulties in the sub-prime mortgage markets,” continued Mr. Gradante.  “However, reports thus far indicate that most funds were able to avoid any big losses.”

The Hennessee Global/Macro Index advanced +1.36% in March (+2.90% YTD).  The Hennessee International Index advanced +2.18% (+3.42% YTD) in March, as international equities outperformed U.S. equities.  The Hennessee Macro Index advanced +0.77% (+1.39% YTD) in March.  In addition to contributions from international equities, macro funds also benefited from the steeper yield curve, as the 2 Year versus the 10 Year Treasury is no longer inverted for the first time since January 2006.  The U.S. dollar also declined versus both the Euro and the Yen.

“Macro managers continue to be concerned about slowing economic growth and stubborn inflation,” stated Mr. Gradante.  “While GDP growth slowed to +2.5% in the fourth quarter, many are expecting even slower growth in 2007 as a result of weak business investment and several headwinds faced by the consumer.”