Hedge Funds Fall As Equity Markets Plummet

Mar 10 2009 | 3:08am ET

Hedge funds lost ground last month after a promising start to the New Year, according to a pair of indices.

The Hennessee Hedge Fund Index declined 0.78% in February (up 0.12% year-to-date), while the Credit Suisse/Tremont Hedge Fund Index was down and estimated 0.45%.

The Hennessee Long/Short Equity Index declined 1.09% last month (down 0.25% YTD). Its Arbitrage/Event Driven Index gained 0.05% (up 2.44% YTD); those strategies have outperformed long/short equity and global/macro strategies thus far this year after a very challenging 2008. Hennessee’s Distressed Index declined 0.02% (up 1.82% YTD).

The Hennessee Merger Arbitrage Index advanced 0.24% in February (up 0.84% YTD).  Many managers state that spreads are attractive as there is less competition in merger arbitrage.  However, many maintain a negative outlook on the strategy as M&A activity has fallen dramatically due to the credit crisis.  Most managers are focusing on smaller, strategic cash deals in order to generate gains.

The Hennessee Convertible Arbitrage Index advanced 0.72% (up 5.91% YTD).  Managers generated gains from a richening in the secondary market and from their positive carry.  The gains were offset by losses attributed to a slight tightening of credit spreads and an increase in interest rates.
The Hennessee Global/Macro Index declined 0.96% (down 1.50% YTD). The Hennessee International Index declined 1.66% (down 0.86% YTD) as managers remained conservative with low gross exposures and reduced risk. The Hennessee Macro Index declined 1.62% for the month (down 1.05% YTD).
“Many macro managers are betting that long term U.S. interest rates will increase over the next 18 months,” said Charles Gradante, co-founder of the Hennessee Group.  “However, the U.S. government needs to keep rates low, especially the 10 year (used to set mortgage rates) in order to eventually provide stability to the housing market.  We may see the U.S. government buying Treasuries to affect low rates… However, this would lead to some serious long term issues.”

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