January Hedge Fund Rally Is Short-Lived
The Hennessee Hedge Fund Index, which tracks the performance of more than 3,500 hedge funds, dropped 0.78% after posting gains of 1.1% in January.
March 9, 2009
Hedge fund performance took a turn for the worse in February by reversing January’s gains last month, according to Hennessee Group, a hedge fund advisory firm.
The Hennessee Hedge Fund Index, which tracks the performance of more than 3,500 hedge funds, dropped 0.78% after posting gains of 1.1% in January. Despite the reversal, the index outperformed the broader market indices; last month, the S&P 500 declined about 11% while the Dow Jones Industrial Average lost just under 12%.
“Hedge funds were flat the first two months of the year, while equity markets have declined almost 20%,” says Charles Gradante, co-founder of Hennessee Group. “Hedge funds are doing what they do best—preserving capital in down markets and generating alpha by managing exposures and perceptive stock selection.”
According to Gradante, hedge fund managers are increasingly seeking opportunities in the corporate and high yield credit markets in an attempt to bolster returns using less risk. "The pervasiveness of this credit theme in long/short equity portfolios is probably the most prevalent theme since we saw long/short equity funds buying credit default swaps (CDS) back in 2006. The CDS trade turned out to be one of the best performing trades for equity funds in 2007," he said in a statement.
Hedge fund declines have been exacerbated by massive investor redemptions, which subsequently triggered many fund managers to impose gates, which limit the amount of withdrawals from a fund. The industry has been reeling from this cycle for months, and according to Gradante fund managers will continue selling to raise capital to meet some redemptions.
Investors, however, are finding other ways to access liquidity. For instance, they have increasingly been turning to auctions where investors can purchase fund interests in the secondary market at a discount to NAV, Gradante says. The benefits, he adds, are that investors gain immediate access to liquidity and hedge fund managers have less pressure to sell securities to fund redemptions.
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