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Hedge Funds Come on Strong in September: Hennessee

Date: Monday, October 8, 2007
Author: Jacob Bunge, Financial Correspondent, Hedgeworld.com

NEW YORK (HedgeWorld.com)—Subprime mortgages … what were those again?

By hitching their wagon to a charging equity market, hedge funds seem to have pulled themselves out of the credit market morass that bogged down some funds' performance over the summer and swallowed a few funds entirely. Hennessee Group LLC reported on Monday [Oct. 8] that its Hennessee Hedge Fund Index was up 2.26% in September as liquidity improved and stocks soared.

The Dow Jones Industrial Average has had a particularly hot run, shooting up more than 8% from mid-August through the end of September while charting record highs; it returned 4.03% in September and was up 11.48% year-to-date. The Nasdaq Composite Index, meanwhile, earned 4.05% for the month, and the Standard & Poor's 500 stock index earned 3.58%. Year-to-date through September those equity market measures returned 11.85% and 7.67%, respectively. The Lehman Aggregate Bond Index rose 0.76%, and gained 3.85% this year through September.

The Hennessee Hedge Fund Index as a whole returned 10.16% year-to-date through the first eight months, and September's bounce was a solid return to positive performance after a decline in August Previous HedgeWorld Story and a nearly flat return in July Previous HedgeWorld Story.

The Hennessee Long/Short Equity Index returned 2.36% in September, following an August loss of 0.1%. Growth-focused managers chalked up a 3.52% gain after struggling to make headway all summer, and returned 12.73% through last month. Value funds earned 1.72% and were up 9.65% year-to-date. Short-biased funds, after enjoying the best three-month run they've had all year, went back to losing money in September. They were down 1.97% for the month, though year-to-date they were still up 0.45%.

"While equity markets have quickly rebounded to new highs, credit markets have failed to recover the entirety of losses suffered over the summer," said Charles Gradante, managing principal of Hennessee Group, in a statement. "This may be indicative of fundamental problems which the equity markets are overlooking. Typically, problems in corporate credit have resulted in losses in equities, as happened in 1990 and 2002."

A bigger return to positive performance was seen in the Hennessee Arbitrage/Event Driven Index, which earned 1.19% in September, following a 1.26% loss in August, and was up 7.1% year-to-date. Arbitrage strategies generally were strong, with convertible arbitrage returning 1.8% after three losing months and merger arbitrage returning 1.26% following two down months. Distressed investing returned 0.61% in September, adding to those funds' year-to-date return of 7.75%. Event-driven managers gained 1.08%, turning around their own three-month losing streak. Year-to-date event driven returned 7.37%.

The Hennessee Global/Macro Index saw most dramatic turnaround; it was up 3.04% last month after a 2.14% drawdown in August. Year-to-date the sub-index was up 12.93% in what has so far been a big year for global equity markets.

International funds put up a 4.23% return in September, bringing their year-to-date return to 16.06%, while Asia-Pacific funds earned 3.63%, and were up 15.97% year-to-date. Europe-focused funds continued to see difficulties, losing 1.32% in their third consecutive month of negative performance, but Latin America managers returned 4.7%, padding their already substantial year-to-date return. Those funds were up 23.75% in the January through September period and were the top-performing strategy across all 23 categories tracked by Hennessee Group.

Macro funds also saw a big gain, 4.19%, and earned 10.06% year-to-date. The dollar fell against most currencies, while oil hit $83 per barrel and gold ended the month at $735 per ounce, an 11% increase.

"The strong economic growth outside of the U.S., particularly in Asia, is having a pronounced effect on commodity prices," Mr. Gradante said. "The inflationary effect of higher commodity prices coupled with the weakness in housing, consumer spending, and the dollar is increasing the risk of a stagflation scenario. Furthermore, gold's rally from $650 in August to $735 in September is a leading indicator of inflationary forces."

The Hennessee Hedge Fund Indices are calculated using data from more than 1,000 hedge funds, derived from Hennessee Group's database of more than 3,500 funds.