Emerging Markets Lead 2007 Performance: Hennessee

Date: Thursday, January 10, 2008
Author: Jacob Bunge, Lipper HedgeWorld

NEW YORK (HedgeWorld.com)—As equity markets slipped into a post-holiday funk a few weeks early, hedge fund strategies tracked by the Hennessee Hedge Fund Index limped back from November losses to close out the year with a 0.3% gain in December, according to Hennessee Group LLC, which maintains the index.

Although 2007 didn't exactly go out with a bang as far as returns, the Hennessee Index capped off the year with an 11.6% year-to-date return, outperforming all of its equity and bond market benchmarks. The Standard & Poor's 500 stock index lost 0.9% in December and finished 2007 with a gain of 3.6%, while the Dow Jones Industrial Average declined 0.8%, bringing its year-to-date return to 6.4%. The Nasdaq Composite Index, though down 0.3% for the month, posted the strongest 2007 gain, 9.8%. Meanwhile the Lehman Aggregate Bond Index gained 0.3% to finish with a 7% return for the year.

The big winners for 2007 were emerging markets, with index-leading returns coming from Asia, Central and South America and pretty much anywhere else that was not the United States and Europe. While December brought a paltry 0.2% gain, the Latin America-focused funds finished the year as the top-performing strategy tracked by Hennessee, turning in a gain of 23.4%. Just behind were international long/short equity funds, earning 0.8% in December and 20% throughout 2007. Asia-Pacific funds returned 15.9% for the year, despite seeing a 0.6% decline last month.

Technology-focused funds were another top performer throughout 2007, returning 20% in a year that saw only one month of negative performance, a 1.95% drawdown in November Previous HedgeWorld Story. In December, tech funds earned 0.3%.

Most other stocks sweated out the last few weeks of the year, but the Hennessee Long/Short Equity sub-index managed to carve out a 0.25% gain, as energy and technology sectors climbed and weakness across financial and consumer sectors persisted.

The Hennessee Arbitrage/Event Driven sub-index increased 0.5% in December, buffeted by volatility in equity and fixed-income markets. Convertible arbitrage managers tracked by Hennessee collectively lost 0.4% over the month, and their year-to-date return of 4.36% was the lowest across the 23 strategies tracked by the firm. Distressed funds gained 0.95% in December to close out the year with a gain of 8.9%, while merger arbitrage sank 0.17% over the month and ended up with a 11.58% year-to-date return.

The Hennessee Global/Macro Index posted the best year-to-date return across Hennessee's three sub-indexes, 15.6%, and climbed 0.56% in December. Some of the thanks went to those high-flying emerging markets strategies, as well as macro funds, which boasted the best December performance with a 2.1% gain as oil and gold prices rallied. For the year, macro funds were up 15.1%.

"Macro managers made substantial gains with a three-legged trade in 2007—short the dollar, long gold, and long oil. The declining dollar and rising oil prices gave way to a 30% increase in the price of gold in 2007," said Charles Gradante, managing principal at Hennessee, in a statement. "In 2008, gold may receive demand for other reasons. Gold is the third currency for central bank reserves and central banks are too concentrated in dollars and euros and therefore want to diversify out of dollars and euros into gold."

What comes next is anyone's guess, but Mr. Gradante took a somewhat bearish view at the onset of 2008.

"The market continues to price in a higher likelihood of a recession for 2008 and is calling for more rate cuts," said Mr. Gradante. "Unfortunately, the Fed is in a bind as inflation continues to inch higher as evidenced by last month's inflation report indicating CPI grew 0.8% in November, the largest increase in over two years. We believe inflation is somewhat out of the Fed's control and being largely affected by demand for commodities from BRIC countries."

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.

JBunge@HedgeWorld.com