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Hennessee: The market correction to come - Historical performance of hedge funds in down markets

Monday, November 02, 2009
Opalesque Industry Updates - Hennessee Group LLC, an adviser to hedge fund investors, addresses the rising concern among investors that the financial markets are due for a near term correction in light of the widespread gains experienced in recent months. Charles Gradante, Co-Founder of the Hennessee Group, stated “With the equity markets up over +50% since the lows reached in early March, and ongoing uncertainty regarding the true health of the global economy, we are fielding more and more questions regarding the sustainability of the current market rally and what are our expectations are for hedge funds in a market correction.”

HISTORICAL HEDGE FUND DRAWDOWNS A FRACTION OF EQUITY MARKETS

The Hennessee Group recently conducted a brief study comparing the performance of the Hennessee Hedge Fund Index relative to the performance of the S&P 500 Index dating back to 1993. The Hennessee Group isolated the analysis to the fifteen largest monthly drawdowns in the S&P 500 Index and measured the downside protection provided by hedge funds using the Hennessee Hedge Fund Index as a proxy. As illustrated in the chart below, hedge funds managed to outperform the S&P 500 Index all fifteen months and generated over +100% in outperformance during these periods of panic. Gradante stated, “Hedge funds participated in only about one third of the market downturn which is due, in large part, to their ability to hedge their portfolios and maintain reduced market exposures. In addition, hedge funds generated a -2.67% average monthly loss over these 15 months while the S&P 500 generated an average monthly loss of -9.38%.” Gradante added, “We would expect to see similar results going forward, particularly given the cautious stance of most hedge funds today as uncertainty and nervousness continues to overhang the financial markets and economy.”

Date S&P 500 Price Index Hennessee Hedge Fund Index Differential
Oct-08 -16.94% -6.81% 10.13%
Aug-98 -14.58% -7.10% 7.48%
Sep-02 -11.00% -1.62% 9.38%
Feb-09 -10.99% -1.06% 9.93%
Feb-01 -9.23% -0.91% 8.32%
Sep-08 -9.08% -6.75% 2.33%
Jun-08 -8.60% -1.38% 7.22%
Jan-09 -8.57% 0.58% 9.15%
Sep-01 -8.17% -2.34% 5.83%
Nov-00 -8.01% -2.46% 5.55%
Jul-02 -7.90% -3.09% 4.81%
Nov-08 -7.48% -3.17% 4.31%
Jun-02 -7.25% -2.19% 5.06%
Mar-01 -6.42% -1.48% 4.94%
Aug-01 -6.41% -0.27% 6.14%
Total -140.63% -40.05% 100.58%
Average -9.38% -2.67% 6.71%

CONCLUSION

Hedge funds are on track for one of their best years since the Hennessee Group started monitoring performance since 1987. The Hennessee Hedge Fund Index is up +20.9% through September relative to the +17.0% gain for the S&P 500 Index. Consistent with longer term results, hedge funds managed to protect capital during the market sell-off in early 2009 and have participated in a good portion of the market rally since March. In addition to strong performance, the Hennessee Group is encouraged by the slowdown in redemptions which is restoring stability to hedge fund organizations and allowing them to once again focus on alpha generation for investors. As investors take note of these positive developments we expect to see renewed interest and growth for the hedge fund industry in the coming years. Corporate website: Source

- FG

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