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International events affect hedge funds’ performance in May; Moore’s and Paulson’s funds fall

Date: Tuesday, June 8, 2010
Author: Hedgetracker.com

Hennessee Group has released its latest hedge fund index performance data for May of 2010. According to the report, the Hennessee Hedge Fund Index dropped -2.99% last month while still outperforming the S&P 500 (-8.20%), the Dow Jones Industrial Average (-7.92%), and the NASDAQ Composite Index (-8.29%). “May was the worst month of the year for hedge funds and the worst monthly drawdown since October 2008,” commented Charles Gradante, Co-Founder of Hennessee Group. “However,” he continued, “hedge fund managers avoided significant losses and outperformed traditional benchmarks on a relative basis due to conservative exposures, hedging and short positions.”

Current events and crises seemed to coincide to create one of the worst environments so far this year. Hennessee’s Long/Short Equity Index dropped -2.81% in May as the equity market’s “Flash Crash” combined with the recent BP oil spill, rising international concerns about European debt, and the worsening tensions in Korea, increasing investors’ wariness and slamming the equity markets as more turned towards U.S. Treasuries. Mr. Gradante explained that the “Flash Crash” of May 6 was most likely “due to high frequency or computer-programmed trading, as several fundamentally sound stocks approached unreasonable price levels. Panic and fear prevailed and liquidity disappeared.” Overall, the oil spill in the Gulf left the energy sector the worst hit (-11.8%), but the financial sector and financial services stocks also performed poorly.

The Arbitrage/Event Driven Index fell -2.62% last month, similarly affected by the widening credit spreads sparked by the Eurozone’s financial worries and sovereign debt concerns. Distressed funds performed the worst, falling -4.87% in May.

Hennessee’s Global/Macro Index dropped -3.50% last month, and international equities and global indices suffered similar losses as Europe’s €110 billion bailout failed to restore international investors’ confidence. According to the Wall Street Journal, two of the world’s largest hedge fund firms, John Paulson’s Paulson & Co. and Louis Bacon’s Moore Capital Management, are also struggling after the blow to the Eurozone. Paulson & Co.’s Advantage, Advantage Plus, credit, and Recovery funds all dropped at least -4.24% in May, according to investors, and Moore Global Investment, Moore Capital’s main fund, dropped over 9%.

Emerging markets were affected by crises of their own, including speculation about some potential tightening in Chinese monetary policy and the escalating conflicts in Korea. “I cannot remember when there have been so many potential ‘global crises’ happening at the same time,” stated Mr. Gradante in the press release. “We have the oil spill in the Gulf of Mexico, the downgrades of the European PIIGS, altercations in the Middle East and Korean Peninsula, and concerns about Chinese monetary policy. There are many things keeping hedge fund managers awake at night.”