ONLY SHORT-BIAS HEDGE FUNDS POSITIVE IN MARCH AS HENNESSEE INDEX FALLS 2.02 PER CENT

hedgeweek
Hedge funds struggled to cope with extreme volatility in March and short bias was the only strategy in positive territory for the month as the Hennessee Hedge Fund Index declined by 2.02 per cent, according to Hennessee Group, an adviser to hedge fund investors.

'March proved very difficult for many hedge funds as extreme levels of volatility have been difficult to manage,' says managing principal E. Lee Hennessee. 'The collapse of Bear Stearns caused many funds to reduce equity exposure, which was followed by a rally in equities on news of a bailout.'

The Hennessee Long/Short Equity Index declined by 2.03 per cent in March and by 4.33 per cent in what was the worst quarter for the strategy since the WorldCom default in the third quarter of 2002.

While losses are expected from long/short equity funds in declining equity markets, Hennessee says, losses were larger than typical in the first quarter as many funds were unable to generate alpha in long and short portfolios.

'We are seeing a number of hedge funds invest in levered loans that banks have priced in the mid-80s in an attempt finally to sell some of the 'hung bridge' loans of the past leveraged buyout boom,' says the firm's other managing principal, Charles Gradante. 'This should provide a floor for the high-yield debt markets unless defaults pick up beyond current expectations of 4 per cent, which would likely require a very deep recession.'

The Hennessee Arbitrage/Event Driven Index declined by 1.39 per cent in March and by 2.46 per cent for the quarter, while the Hennessee Distressed Index was down 1.12 per cent and 3.14 per cent respectively.