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“After several months of treading water, managers posted profits as stocks rallied on fundamentals, being driven less by macroeconomic and political news and more by underlying company specific fundamentals,” commented Charles Gradante, Co-Founder of Hennessee Group.“The top performing managers were positioned for a January rally and were long stocks that underperformed in 2011.”

“January was a good month for hedge funds. After a -4.6% decline last year, the industry has a more positive outlook for 2012,” said Lee Hennessee, Managing Principal of Hennessee Group. “It is encouraging to see a respectable gain even with managers conservatively positioned. Looking forward, managers are still cautious but are optimistic on the potential to generate positive alpha.”

Equity long/short was one of the best performing strategies in January, as the Hennessee Long/Short Equity Index advanced +2.47%. Stocks pushed higher in January, led by technology and financials, as U.S. economic data continued to show signs of improvement. In addition, volatility declined as investor sentiment around the European sovereign debt crisis improved. Managers benefitted from improving conditions. Stock-picking generated alpha as volatility and correlation declined, equity market inflows increased, and investors started actively allocating capital to new ideas. Many managers took advantage of the “January Effect” by increasing exposures at the beginning of the month. While hedge funds lagged long only benchmarks on a relative basis as shorts and hedges detracted from performance, long/short equity were able to generate a significant in January with average exposure levels, an encouraging sign for 2012.

Generally, managers commented that it seems the market wants to go higher as long as Europe stabilizes. Managers are still monitoring the situation in Europe as Greece’s debt problems have not been resolved. However, it seems most feel that the debt issues will be resolved in the long run and are focusing less on short-term political noise, resulting in a decline in volatility.

The Hennessee Arbitrage/Event Driven Index advanced +2.31% in January. The strategy posted its best month since December 2010, with positive contributions across all strategies. Along with an equity market rally, credit markets advanced for the month, with the exception of Treasuries. Spreads on high yield bonds tightened to 654 basis points from 723 basis points, the narrowest level since August 2011, according to the Bank of America.

The Hennessee Distressed Index increased +3.24% in January. Long-biased portfolios benefited from the continued market rally and outperformance of underperforming 2011 stocks. The outlook for distressed managers has improved as investors start increasing risk and investing on fundamentals. The Hennessee Merger Arbitrage Index advanced +1.25% in January. During the month, corporate credit and M&A deal spreads tightened. While the NYSE/Deutsche Borse deal fell apart, managers benefited from significant activity in the healthcare and technology sectors. While January deal flow was lacking, managers expect acceleration in deal activity as company valuations are low, interest rates are low, and corporate cash is high. The Hennessee Convertible Arbitrage Index returned +1.91% as the convertible space richened in January. Tightening of spreads and improved equity markets were positive drivers for convertible strategies. Non-traditional outright buyers of convertibles remain very active, providing a floor for valuations.

“During the month, bullish sentiment was boosted by dovish Fed comments which left the door open to additional quantitative easing.” commented Charles Gradante. “Many managers remain concerned about the long term ramifications of continued monetary easing, causing managers to hold gold as a long term hedge. While the precious metal has been volatile, up +14% in January, managers still see significant upside. Most managers have already built full positions but will add on pullbacks greater than 10%.”

The Hennessee Global/Macro Index advanced +2.89% in January. International equities advanced, driven by Emerging Markets, as the MSCI EAFE Index increased +5.25%. International managers underperformed due to conservative positioning. Emerging market hedge funds were top performers for the month, as the Hennessee Emerging Market Index advanced +6.15%. In addition to the European sovereign debt crisis and a possible slowdown in China, managers are closely monitoring the political and social unrest in the Middle East and several have concerns about Iran and Syria. The Hennessee Macro Index increased +1.46% for the month. Manager benefited from gains in global equity and credit markets. The U.S. Dollar declined against the Euro and Yen. In fixed income, the U.S. treasury curved steepened as longer dated yields rose. Commodity metals rallied, with the S&P Goldman Sachs Commodity Index returning +2.23%. Precious metals outperformed, with gold advancing +13.9% and silver climbing +19.2%. Managers also had gains in agricultural commodities.

(press release)

Performance table

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 Indices® 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. www.hennesseegroup.com

BG