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Hedge Funds Generate Positive Returns in September (October 12, 2005)

Location: Greenwich
Author: Hennessee Staff
Date: Wednesday, October 12, 2005

Hennessee Group announced that hedge funds performed strongly in September, while all major indices were flat to positive for the month. The Hennessee Hedge Fund Index climbed +1.70% (+6.22% YTD). The broad equity market indices rallied after a negative August as the S&P 500 increased +0.81% (+2.76% YTD), the Dow Jones Industrial Average rose +0.83% (-2.00% YTD), and the NASDAQ Composite Index was flat at -0.02% (-1.09% YTD). The bond markets were down in September, as represented by the Lehman Brothers Intermediate Government Corporate Bond Index, which decreased -0.85% (+1.05% YTD).

Hedge funds continued to generate alpha (performance above market averages) on both the short and long side of the portfolio. Twenty-one hedge fund strategies were positive in September, while the remaining two were down less than eight basis points.

The Hennessee Long/Short Equity Index increased +1.36% (+5.61% YTD) in September. Equity managers produced strong gains on the long side in a weak equity market influenced by Hurricanes Katrina and Rita and the fear of decreased consumer spending. We noticed a trend in managers moving into larger cap names as they believe that the large cap companies have a better risk/reward profile and greater international opportunities. Many managers believe the outperformance of small caps over large caps in the last five years will shift in favor of large caps through 2006. Of concern to Hennessee Group are equity managers setting up for a beta rally in the fourth quarter.

The Hennessee Arbitrage/Event Driven Index was up in September, returning +1.17% (+4.28% YTD). Distressed managers posted a strong September as Delta and Northwest filed for bankruptcy and Delphi filed over the weekend. Convertible arbitrage managers had a strong September (+1.62%) to finish out a solid third quarter and continue the rally from May's bottom. Though volatility has remained flat, redemptions have slowed, new issuance is up slightly over September 2004, and buying has increased.

Merger arbitrage managers may be the next hot strategy as Europe is setting the stage for a continuation of deals going forward. Seven of the ten largest deals done globally in the third quarter, including the three largest deals overall, were in Europe, not the U.S. Convertible arbitrage also has turned the corner and looks promising, especially the 'vega' (volatility) sensitive sector. Nonetheless, we continue to be concerned about the structured credit markets.

The Hennessee Global/Macro Index rallied +3.42% (+10.20% YTD) in September. Macro managers capitalized on the gold rally (it hit $475 mid-month), the sell off in oil from near record highs of $69 per barrel, and the extension of the dollar rally against the euro. Macro managers playing the Emerging market were also helped in September (MSCI Emerging Market Index up 9.1% for the month).

Many macro managers are setting up for the threat of 'stagflation'; short the ten year Treasury, short basic materials, and long gold and oil.

Disclosure: Hennessee Group LLC is a Registered Investment Adviser that consults direct investors in hedge funds on asset allocation, manager selection, and ongoing monitoring of hedge fund managers. Hennessee Group LLC is not a tracker of hedge funds. The Hennessee Hedge Fund IndicesĀ© are for the sole purpose of benchmarking individual hedge fund manager performance. The Hennessee Group does not sell a hedge fund-of-funds product nor does it market individual hedge fund managers. This material is for your general information only and is not an offer or solicitation to buy or sell any security, including any interest in a hedge fund.
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