The figures are in and they aren’t pretty. The Hennessee Hedge Fund Index declined 6.24% in September (-10.28% YTD). But while ugly, hedge funds still trumped the S&P 500, which declined 9.08% (-20.57% YTD).
“Despite being defensively positioned, September was the worst month for hedge funds in over a decade” said Charles Gradante, co-founder of Hennessee Group.
“Hedge funds have outperformed on a relative basis year to date. However, given their reduced exposures over the first nine months of the year, I would expect hedge funds to be down less,” said Lee Hennessee, managing principal of Hennessee Group. “Violent theme reversals, extreme volatility and unpredictable intervention have contributed to negative performance.”
The Hennessee Long/Short Equity Index declined 5.86% in September (-9.31% YTD). The majority of losses came in the last two weeks of the month as the government restricted short selling and liquidity disappeared. The intervention created a massive short squeeze, while long positions were pushed lower by de-leveraging/liquidity concerns.
“Convertible arbitrage portfolios faced massive mark to market losses” said Gradante.
The Hennessee Arbitrage/Event Driven Index declined 6.38% in September (-9.22% YTD).
Meanwhile, the Hennessee Distressed Index declined 3.85% in September (-10.31% YTD), as the spread on the Merrill Lynch High Yield Index widened sharply from 836 bps to 1096 bps during the month, a level not seen since 2002.
The Hennessee Merger Arbitrage Index declined 1.77% in September (+0.71% YTD), as short selling restrictions handicapped managers ability to put on trades. According to the firm, merger arbitrage spreads have pushed out to very attractive levels with many deals now offering annualized returns of more than 20%, double the level of a few months ago.
The Hennessee Convertible Arbitrage Index declined 11.25% in September (-13.40% YTD), its worst month in history. Convertible arbitrage portfolios were under severe negative pressure due to the SEC’s ban on short-selling of financial names and indiscriminate selling due to liquidations. They were also hurt by the defaults/near defaults of Lehman Brothers, Fannie Mae, AIG, Washington Mutual and Wachovia, whom had all tapped the convertible market for capital.
“Many macro managers are betting on lower interest rates in Europe,” said Gradante. “Currently, Europe has an inverted yield curve while credit spreads are widening. This should help force Europe to lower short term rates and steepen their yield curve. It will also help the credit markets.”
The Hennessee Global/Macro Index declined 5.93% in August (-12.74% YTD). International equities continued to decline sharply in September with the MSCI EAFE Index declining 14.71% (-31.07% YTD) as global markets faced de-leveraging and a flight to quality.
Performance for international long/short equity funds was worse than U.S. funds, as the Hennessee International Index declined 8.00% (-15.76% YTD). Weakness was broad-based, but especially painful in emerging markets such as Russia and Brazil.
The Hennessee Macro Index declined 1.73% for the month (-0.16% YTD). Managers continued to suffer as commodities sold off, as the Reuters/Jefferies CRB index has declined 43% from its peak in early July. Macro managers were able to generate profits as investors poured into gold amid concerns of a global recession.
“Many macro managers have put on a ‘global recession trade’,” said Gradante. “They are long duration bonds while short equities and credit.”