HEDGE FUNDS GENERATE NEGATIVE RETURN OF -1.75% IN APRIL
Stagflation Comes Up For the Second Time in Seven Months
May 9, 2005 � New York, NY � Hennessee Group LLC, an adviser to hedge fund investors, today announced that weak equity markets contributed to negative performance of hedge funds in April, as the Hennessee Hedge Fund Index declined -1.75% (-1.62% YTD). The broad market indices were also negative for the month as the S&P 500 declined -1.90% (-4.01% YTD), the Dow Jones Industrial Average declined -2.96% (-5.48% YTD), and the NASDAQ Composite Index declined -3.88% (-11.67% YTD). After a positive first quarter, hedge funds moved into negative territory for the year as April marked a significant decline across all broad market indices.
�Hedge fund managers are expressing their own �conundrum�,� stated Charles Gradante, managing principal of Hennessee Group LLC. �The decline in oil prices was significant, but not enough to turn the market around. The �S� word, Stagflation, has resurfaced in our conversations with equity hedge fund managers.�
The Hennessee Long/Short Equity Index declined -2.19% (-3.10% YTD) in April. Poor retail sales, slumping housing costs, and low consumer confidence caused a market sell-off, pushing the market to six month lows. Surprisingly, the drop in oil markets was not enough to turn the markets around. Hedge fund managers reduced their net exposure, adopting a conservative position, despite the improving fundamentals as witnessed by the better than expected first quarter 2005 earnings. On the short side, managers are performing, particularly those managers whose shorts hurt them in 2004.
�Arbitrage managers are coping with a general flight to quality due to a shift in capital formation,� said Mr. Gradante. �Cross currents in the markets are shaking out weak equity and Bond holders, which many believe will allow a base to form for those markets, leading to better returns in the second half.�
The Hennessee Arbitrage/Event Driven Index was down in April, returning -1.32% (-0.71% YTD), as the convertible bond sell-off continued, creating the worst convertible arbitrage environment since 1994. Despite an increase in equity volatility, the convertible market was negatively effected by widening credit spreads, continued problems at General Motors (the largest issuer of convertible bonds), and continued redemptions from investors. Distressed and merger arbitrage hedge fund managers declined as spreads widened slightly, there was a small move to quality (due to a perceived increase in market risk), and deal spreads remained narrow.
�Macro managers reported that they made money short oil, short the S&P 500 contracts, and long the yen vs. the U.S. dollar,� commented Mr. Gradante.
The Hennessee Global/Macro Index declined -0.82% (+0.99% YTD) in April. Macro hedge funds were flat in April as the Treasury markets and gold rallied, but commodities and oil sold off as investors moved to quality due to concerns of an economic slowdown. Globally, international markets sold off after a strong first quarter performance, where they outperformed US markets.
