Guest post from the Hennessee Group.

HEDGE FUNDS DECLINE -0.60% IN DECEMBER

Hedge Funds Experience Worst Year Since 2008; Underperform Equity Markets in 2011

January 9, 2012 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.60% in December (-4.27% YTD), while the S&P 500 advanced +0.85% (-0.02% YTD), the Dow Jones Industrial Average advanced +1.43% (+5.52% YTD), and the NASDAQ Composite Index fell -0.58% (-1.81% YTD).  The Barclays Aggregate Bond Index gained +1.10% (+7.86% YTD),  the S&P/BG Cantor 7-10 Year Treasury Bond Index climbed +1.84% (+15.60%), and the Barclays High Yield Index gained +2.66% (+4.98% YTD).

“It was a disappointing year for hedge funds as they underperformed broad market returns for the second year in a row,” commented Charles Gradante, Co-Founder of Hennessee Group.  “Hedge fund managers describe 2011 as ‘more frustrating than 2008’.  High levels of uncertainty and the highest daily average volatility in 50 years resulted in managers getting ‘whipsawed’.  While risk management dictated reduced exposures going into the fourth quarter, it precluded them from participating in a strong beta rally.  In addition, alpha generation was extremely challenging throughout the year due to a macro-driven, high correlation environment.”

“Despite the performance struggles, we are optimistic on the outlook for the hedge fund industry.  Hedge funds continue to attract capital due to their historical performance and ability to lower volatility and preserve capital.  In addition, most investors understand the challenges for fundamentally-based managers in a macro driven market, and are confident they will not persist,” commented Lee Hennessee, Managing Principal of Hennessee Group.  ”While we are seeing some funds liquidate due to poor performance, we are seeing many quality managers closing the door to new capital as they reach capacity limits.”

The Hennessee Long/Short Equity Index declined -0.77% in December and was down –3.55% for 2011. For the year, top performing funds were concentrated in better performing sectors, such as utilities, consumer staples and healthcare as well as long fixed income.  2011 was a mixed year for traditional benchmarks with the S&P closing the year flat, the Dow up (+5.52%) and the Russell 2000 down (-5.45%). Although the S&P 500 was flat, sectors showed a wide variance, with utilities performing the best, up +14.83%. Financials and materials were the worst performers, down -18.41% and -11.64%, respectively.  Throughout the year, equity markets were driven by macro issues, which overshadowed strong corporate earnings and an improving economy.  Several hedge funds experienced frustration in long positions where companies delivered and exceeded expectations but still declined more than the broad indices.  Shorting was profitable for managers, though most report that they should have had more invested on the short side.  One of the key drivers of underperformance was lack of beta participation during the strong October rally.  Managers entered the fourth quarter with low exposure levels in an effort to protect capital and were caught off guard by the double digit rally in equity markets.  Looking forward, managers state that equities look cheap relative to expected earnings and interest rates, but they remain concerned about slowing global economic growth and European sovereign debt issues, which should keep multiples low.  However, if the European sovereign debt crisis can be contained, and there is some improvement in the housing and employment in the U.S., it would be very bullish for equities in 2012.

“Despite the fact that U.S. companies posted record profits, the market was flat in 2011. Fundamentals did not matter to investors.  Rather, they were focused on the flurry of macro headlines from Europe, Asia, the Mideast and the U.S.  Investors fluctuated wildly between ‘risk on’ and ‘risk off’ after the geopolitical strife in the Middle East, Japan’s earthquake and tsunami, the debt crisis in Europe, and legislative gridlock in the U.S.” commented Charles Gradante. “That said, we at Hennessee Group are positive for 2012.  Equity markets are priced as cheaply as they have been in decades.  Corporate earnings should remain strong, and the U.S. economic recovery is picking up steam.  Volatility will continue, but we think the positive fundamentals will have more relevance in 2012 than 2011.”

The Hennessee Arbitrage/Event Driven Index advanced slightly in December, declining -0.08%.  For the full year, the Hennessee Arbitrage/Event Driven Index was down -2.17%, making it the best performing sub-strategy.  Fixed income performed well throughout the year.  In December, the Barclays Aggregate Bond Index gained +1.10% (+7.86% YTD).  Treasuries were positive, as the S&P/BG Cantor 7-10 Year Treasury Bond Index advanced +1.84% (+15.60%).  High yield was also positive as the Barclays High Yield Credit Bond Index advanced +2.66% (+4.98% YTD).  High yield credit spreads tightened from 779 basis points to 723 basis points in December.  Managers report that supply demand dynamics for credit remain strong, and they are finding attractive investment opportunities in high yield and leveraged loans.  The Hennessee Distressed Index advanced +0.81% in December (-2.36% YTD).  2011 was a challenging year for distressed investing.  Many managers were biased towards post reorganization equities, which remained unloved by the market.  In addition, the European sovereign debt crisis shook confidence, delayed catalysts and pressured valuations.  That said, managers feel conditions are improving and positions should realize value.  In addition, managers are looking towards a wave of loan refinancing in 2013/14 as a significant source of opportunity.  The Hennessee Merger Arbitrage Index decreased -0.08% in December (+0.18% YTD).   Merger arbitrage funds ended the year slightly positive. While there were several attractive deals, high volatility and low interest rates detracted from performance. Despite a strong start, 2011 total mergers-and-acquisitions volume ($2.60 trillion) was less than in 2010 ($2.66 trillion).  Europe’s sovereign-debt crisis shattered the confidence of company executives to do deals despite cash rich balance sheets and low interest rates.  Managers are somewhat optimistic that high cash levels and low multiples will drive merger and acquisition opportunities in 2012, especially if the Euro crisis subsides. The Hennessee Convertible Arbitrage Index advanced +0.25% in December (-1.02% YTD).  On a regional basis, convertibles declined in the US and Asia, but sold off the most in Europe due to the ongoing sovereign debt concerns. Leverage is low among convertible arbitrage managers.  Managers have dry powder available for when opportunities arise.

“It is still a bit early, but there are going to be some good investment opportunities in Europe.  Convertible arbitrage managers are looking into the announced recapitalization of European financial institutions to meet new regulatory requirements.  This will likely create attractive short-term investment opportunities as banks call securities to restructure balance sheets,” commented Charles Gradante.  “It is still early due to the European sovereign debt crisis, but we could see some interesting investment opportunities coming out of Europe.”

The Hennessee Global/Macro Index declined -0.64% in December (-8.04% YTD), driven by losses in international and emerging markets.  International markets underperformed domestic markets for the month and year, as the MSCI EAFE was down -1.03% for December and down -14.82% for the year.  Throughout the year, international markets were battered by macro headwinds and unexpected developments, such as the Japanese Tsunami, Middle East rebellion, European sovereign debt crisis and U.S. debt downgrade.  International hedge fund managers outperformed, but were still down as the Hennessee International Index fell -0.76% in December and -6.39% year to date.  Many managers were positioned for a decoupling of emerging markets from developed markets and upside from continued strong growth.  However, throughout the year, investors grew concerned about slowing growth and recession in the emerging markets, and markets plunged. The MSCI Emerging Markets Index lost -1.29% for the month, leaving it down -20.41% for the year.  The Hennessee Emerging Markets Index was down -0.55% in December and down -12.85% for the year as hedge funds benefited from reduced exposures and hedges.  The Hennessee Macro Index was down -0.48% in December (-2.14% YTD).  Performance of macro funds was varied.  The best performing funds were positioned conservatively, long Treasuries, TIPS, and gold.  Interest rates continued to decrease in December, as debt and policy issues in the U.S. and Europe played the central role.  The 10-year Treasury dropped 21 basis points during the month to close at 1.88%.  The 30-year Treasury decreased to 2.90%, down from 4.34% at the end of 2010.  Gold ended the year at $1,568 down from $1,751 in November due to profit taking, but still up +10% for the year.  The U.S. Dollar Index advanced +2.31% in December, pushing it in to positive territory for the year, up +1.46%. The commodities run ended abruptly in 2011.  The S&P GSCI declined -2.11% in December and was down -1.18% for the year.

* For a more in depth monthly review of the economy, capital markets, and hedge fund performance and strategies, the Hennessee Group offers the monthly Hennessee Hedge Fund Review (www.hennesseegroup.com/hhfr/ ).

Guest white paper by Patrick J. McCurdy of Merlin Securities — The investor due diligence process has evolved with the growth of the hedge fund industry. What was once a short and rather perfunctory process has grown into one which today is highly quantitative and detailed. While there is no one-size-fits-all formula for investors, one certainty is that managers who understand the components of the due diligence process will have an easier time meeting the requests of investors.

This article and the related white paper, which are based on numerous conversations with investors, seeks to identify and describe the components of a professional due diligence process—from simple annual return figures to detailed attribution analysis. The end goal is to provide a basic roadmap that can help fund managers understand the depth and breadth of this process and ultimately to help them achieve their fundraising goals.

Download the complete white paper

Guest post from the Hennessee Group.

HEDGE FUNDS DECLINE -0.96% IN NOVEMBER

(Sounds like a Broken Record) Hedge Funds Get ‘Whipsawed’ Again

December 8, 2011 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.96% in November (-3.91% YTD), while the S&P 500 decreased -0.51% (-0.85% YTD), the Dow Jones Industrial Average advanced +0.76% (+4.04% YTD), and the NASDAQ Composite Index fell -2.39% (-1.23% YTD). The Barclays Aggregate Bond Index lost -0.09% (+6.69% YTD) as bonds were mixed. Treasuries increased with the S&P/BG Cantor 7-10 Year Treasury Bond Index climbing +0.70% (+13.52%), while the Barclays High Yield Credit Bond Index fell -2.74% (+1.66% YTD).

“One hedge fund manager referred to November as a game of ‘macro roulette’ with major equity indices fluctuating wildly on news concerning the European sovereign debt crisis,” commented Charles Gradante, Co-Founder of Hennessee Group. “For most of the month, the markets were in ‘risk off’ mode, and global equity markets plunged. At one point, the S&P 500 was down over -9% for the month. The last few days of November saw a complete reversal and a rally in response to coordinated global easing and the hope for European stability, erasing the month’s losses. This environment has proven extremely challenging, and hedge funds were whipsawed again.”

“Hedge funds have been conservatively this year positioned due to elevated risks in the market. As a result, they have underperformed for the year,” commented Lee Hennessee, Managing Principal of Hennessee Group. “In recent weeks, hedge funds have increased net exposures marginally, but remain well hedged. They have consolidated into high conviction names and added macro level protection. Despite recent challenges, many are optimistic and want to remain flexible in order to take advantage of attractive investment opportunities once markets stabilize.”

The Hennessee Long/Short Equity Index declined -0.45% (-2.94% YTD) in November. Hedge funds entered the month with conservative exposures and were positioned well to protect capital in a down market. Equity markets traded mostly lower during the month, dragged down by about the worsening European debt crisis. However, a strong three-day rally at month end, which saw the S&P 500 Index gain +7.69%, reversed the month’s losses. The best performing sectors during the month were consumer staples (+2.41%) and energy (+1.65%), while the worst performing sectors were financials (-5.02%) and information technology (-1.87%). Hedge funds underperformed the markets during the rally as short portfolios generated losses. In addition, several managers reported that long positions lagged as many names faced selling pressure ahead of year end. While managers remain cautious about the macro picture, managers are bullish on equities over the longer term. Companies have strong fundamentals and posted record earnings in the third quarter of 2011. Cash is at an all-time high, dividend payments are up, and cash flow is strong. However, over the shorter term, managers are cautious, as the investment environment has become extremely challenging. In the current environment, managers are well hedged in order to protect capital in case of a major ‘risk off’ move and with significant cash balances in order to be opportunistic once new investment opportunities present themselves.

“As many hedge fund managers anticipated, the ‘Super Committee’, which was tasked with creating a plan to reduce the U.S. deficit by November 23rd, did not deliver” commented Charles Gradante. “Both political parties appear to be digging in their heels and plan to make debt reduction a key issue in the 2012 election year. The result will be greater uncertainty for the markets, which will continue to serve as a headwind for equity markets.”

The Hennessee Arbitrage/Event Driven Index declined in November, falling -0.47% (-2.15% YTD) as risk assets declined and spreads widened. The Barclays Aggregate Bond Index fell, down -0.09% (+6.69% YTD). Treasuries were positive, as the S&P/BG Cantor 7-10 Year Treasury Bond Index advanced +0.70% (+13.52%). The Barclays High Yield Credit Bond Index declined -2.74% (+1.74% YTD). High yield credit spreads widened from 707 basis points to 779 basis points at month end. Managers state that spreads for high yield bonds and loans are cheap relative to default risk, though managers remain cautious as macro risks are extensive, volatility remains high, and interest rates are at historically low levels, justifying the higher than average spread. That said, this provides attractive security selection opportunities for credit focused hedge funds. The Hennessee Distressed Index declined -0.96% in November (-3.26% YTD). Default activity picked up to the highest level since November 2009 as American Airlines filed for bankruptcy. However, default rates remain low and are expected to remain low for the next couple years. Distressed managers suffered losses due to weakness in illiquid names and post reorganization equities, which lagged during the late month rally. The Hennessee Merger Arbitrage Index increased +0.13% in November (+0.00% YTD). Merger arbitrage funds were essentially flat for the month. Deal activity continues, and managers are actively putting capital to work. The volatility is providing trading opportunities as managers continue to focus on strategic deals. The Hennessee Convertible Arbitrage Index declined -0.29% (-0.88% YTD) in November. Convertible portfolios were down slightly due to wider credit spreads. Volume was light and valuations were little changed.

“While the U.S. economic data appears to be somewhat encouraging, European debt and economic worries will likely continue to weigh on investor confidence. Most managers expect very low GDP growth for the Eurozone next year and for several countries to contract,” commented Charles Gradante. “Austerity measures have already pushed some periphery countries into recession. Thus, the investment outlook remains negative. However, managers are optimistic that this will create compelling opportunities across several strategies, including event driven, distressed and macro.”

The Hennessee Global/Macro Index declined -2.77% in November (-8.01% YTD), driven by losses in global markets. International equities performed in line with U.S. stocks throughout November, though movements were amplified. The month was dominated by two key negative issues: U.S. and European debt and the slowing growth of European nations. Conditions dramatically approved on November 30, when central banks in the U.S., EU, Britain, Canada, Japan and Switzerland lowered the cost of U.S. dollar swaps by 50 basis points in order to increase global liquidity, resulting in a strong global rally in risk assets. Despite the month-end rally, the MSCI EAFE was down -4.85% for November (-11.30% YTD). The financial sector was the hardest hit due to its exposure to European sovereign debt. International hedge fund managers were negative, but outperformed as the Hennessee International Index fell only -0.71% (-5.63% YTD). The MSCI Emerging Markets Index lost -6.75% for the month, leaving it down -19.37% for the year. Managers suffered losses as equities fell due to concerns about slower growth. Key detractors included Brazil (-7.21%), India (-15.19%), and China (-8.46%). Hedge fund managers were down, but outperformed due to hedges, as the Hennessee Emerging Markets Index was down -3.60% (-12.06% YTD). The Hennessee Macro Index was down -1.12% in November (-2.23% YTD). Macro funds continue to post mixed performance, with some funds generating profits in gold, treasuries and the U.S. dollar, while others experiences losses due to currency, commodities and equity exposures. The U.S. Dollar Index increased +2.89% (-0.84% YTD), benefiting funds positioned with a “risk off” bias. Managers also generated gains long precious metals as gold closed the month at $1,751 per troy ounce. Treasuries advanced as interest rates decreased in November. The 10-year Treasury declined to 2.09% and the 30-year Treasury decreased to 3.07%. Outside of precious metals, commodity prices were mostly down.

* For a more in depth monthly review of the economy, capital markets, and hedge fund performance and strategies, the Hennessee Group offers the monthly Hennessee Hedge Fund Review (www.hennesseegroup.com/hhfr/ <http://www.hennesseegroup.com/hhfr/> ).

Guest post courtesy of our friends at Herrick.

On October 31, 2011, the SEC and the CFTC jointly adopted rules implementing Dodd- Frank’s1 systemic risk reporting requirements applicable to investment advisers to private funds, and to certain commodity pool operators and commodity trading advisors.2 The rules are intended to support the efforts of the Financial Stability Oversight Council, created by Dodd-Frank, to monitor systemic risk in the U.S. financial markets. Form PF will elicit empirical data concerning private funds, and their advisers, which may disclose financial activities which pose systemic risk. Information provided on Form PF will be provided on a confidential basis, although the SEC may use such information in an enforcement action. In addition, the SEC may share the information with other federal regulators or self-regulatory organizations, in addition to the Council and the CFTC, for purposes within the scope of their jurisdiction.

Continued…download the PDF.

Qualified investors are invited to join us on December 13th in NYC to hear 25 hedge fund managers discuss opportunities they see in their sector. After a two hour presentation session you will have an opportunity to speak with each manager one on one to ask more specific questions about their view on the market. We will conclude the afternoon with a wine and cheese reception for more networking.

TUESDAY * DECEMBER 13th * NYC

1:00 – 3:30 Manager Presentations
3:30 – 5:00 Structured networking at tables
5:00 – 6:00 Wine & Cheese Networking Reception

Location

Offices of Herrick, Feinstein LLP – 2 Park Ave. ( 32/33rd Street ) – 14th Floor – NYC, NY

A Sample of Hedge Fund Participants (total group will include 25 funds)

RCM (A company of Allianz Global Investors) – L/S Healthcare
Tortoise Capital MLP Fund – Energy Infrastructure MLPs
American Capital Financial Group – Emerging Markets / ABL
C&S Advisors – L/S Equity focused on consumer sector
FJ Capital Management – L/S Equity focused on community and regional banks
Windmill Capital – Equity hedged investing in European mutual funds
Center Coast Capital Advisors – MLP Long Only fund
HRC – Investing in company spin-offs
JP Global Capital Management – Currency Fund
BTS Asset Management – High Yield
Tricoastal Capital – Global Macro
Beacon Crest Capital – L/S Equity
IBS Capital – Event Driven/Distressed
Sturgeon Capital Ltd – Frontier and Emerging Markets
Hunting Hill – Event Driven
SC Management – Short Biased
JJN Capital Advisors, LLC – Special Situations
Chirial Advisors – L/S Equity
Hildene Advisors – Fixed Income
Southshore Capital – Global long/short equity focused on the technology and media sectors
Beachdale Capital Mgmt – Commodities

RSVP

Seating is limited and registration is required.

Contact Lisa Vioni lvioni@hedgeconnection.com
212-537-6152 x301

Guest post from the Hennessee Group.

HEDGE FUNDS ADVANCE +2.46% IN OCTOBER

Hedge Funds Underperform as Equity Markets Experience Best October in 37 Years

November 8, 2011 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +2.46% in October (-2.95% YTD), while the S&P 500 increased +10.77% (-0.35% YTD), the Dow Jones Industrial Average advanced +9.54% (+3.25% YTD), and the NASDAQ Composite Index climbed +11.14% (+1.19% YTD).  The Barclays Aggregate Bond Index advanced +0.11% (+6.79% YTD) as bonds were mixed. Treasuries declined with the S&P/BG Cantor 7-10 Year Treasury Bond Index falling -1.31% (+12.73%), while the Barclays High Yield Credit Bond Index increased +5.99% (+4.52% YTD).

Guest post from the Hennessee Group.

HEDGE FUNDS DECLINE -3.36% IN AUGUST

Hedge Funds Suffer Worst Loss in Over a Year

September 8, 2011 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined –3.36% in August (-1.80% YTD), while the S&P 500 declined -5.68% (-3.08% YTD), the Dow Jones Industrial Average fell -4.36% (+0.31% YTD), and the NASDAQ Composite Index decreased -6.42% (-2.78% YTD).  Bonds were mixed, as the Barclays Aggregate Bond Index advanced +1.46% (+5.90% YTD) and the Barclays High Yield Credit Bond Index fell -4.00% (+1.95% YTD).

“August was a very challenging month for hedge funds as they were once again ‘whipsawed’.  Hedge funds were forced to reduce exposure in order to limit losses as the financial markets plummeted.  They then underperformed as the markets rallied back strongly into month end,” commented Charles Gradante, Co-Founder of Hennessee Group.  “Markets continue to be driven by fear, resulting in high correlation among asset classes.  The result is one of the most challenging investment environments for hedge funds on record since inception of the Hennessee Hedge Fund Indices in 1987.”

“Hedge funds experienced their worst loss in August since October 2008.  Directional strategies, such as long/short and event driven, were the hardest hit, while short biased and macro funds were the best performing strategies,” commented Lee Hennessee, Managing Principal of Hennessee Group. “For the year, hedge funds are down about -2% on average, but that masks the wide dispersion in individual hedge fund manager returns.”

The Hennessee Long/Short Equity Index declined -3.68% (-1.65% YTD) in August, its fourth consecutive negative month. August was a turbulent month in the equity markets as the S&P 500 declined -5.68% for the month and was down as much as -17% during the month.  The combination of slowing global growth, intensifying European sovereign debt issues, the U.S. debt downgrade, and disapproval with the political process triggered a sharp selloff.   Momentum selling exacerbated losses, resulting in a slow motion market crash. While a month end rally relieved some of the losses and masked monthly volatility, investor confidence was shaken and the likelihood of a double-dip recession has increased.  This environment has been extremely challenging for hedge funds as the correlation between assets has increased to almost 80%, surpassing levels seen during the credit crisis of 2008. During the month, losses in many core positions were exacerbated as many hedge funds had overlapping holdings.  Managers responded by taking down exposure levels and increasing their cash balance.  Managers also shifted to higher quality, large cap names and traded out of more economically sensitive names for more recession-resistant ones.  In addition, managers are using a variety of tools to hedge downside risk, while trying to maintain the ability to participate if we were to experience a sharp rally.

“The political stalemate and resulting uncertainty has become a major issue for the financial markets.  The inability for the U.S. political system to make progress has caused consumer and corporate confidence to decline significantly,” commented Charles Gradante.  “As a result, individuals and businesses are reluctant to spend, hire, or invest.  While a recession seemed unlikely a few weeks ago, the probability of another recession has meaningfully increased over the last month.”

The Hennessee Arbitrage/Event Driven Index declined in August, falling -2.98% (-0.79% YTD). Bonds were mixed as investors sold risky assets and fled into safe havens.  U.S. Treasuries benefited from the flight to quality and yields declined substantially, while investment grade and high yield spreads increased substantially in August.  Trading in the high yield market, which is seasonally slow in August, was essentially non-existent.  The limited liquidity was challenging for managers looking to reduce risk in the declining market, helping to exasperate mark-to-market losses.  Managers responded by adding short exposure in highly liquid instruments in order to protect capital. That said, after a painful August, managers are selectively adding to attractive opportunities, but remain cautious.   The Hennessee Distressed Index decreased -6.01% in August (-2.22% YTD). Distressed managers suffered significant losses as investors increased risk aversion in a flight to quality.  Core long positions declined more than the market as investors sold risky assets indiscriminately.  Hedges provided some relief, but distressed managers were hurt by their traditional long bias.  Managers also suffered from a lack of catalysts as tumultuous markets prevented companies from pursuing refinancing, IPOs and other events.  The Hennessee Merger Arbitrage Index declined –1.77% in August (+0.31% YTD). Merger arbitrage mangers experienced losses as spreads in even the most solid merger arbitrage transactions widened dramatically.  As a result, managers are finding opportunities to selectively add to positions at very attractive levels.  The Hennessee Convertible Arbitrage Index returned -1.95% (+0.60% YTD) in August.  Convertible securities sold off along with other risk assets.  As a result, the Merrill Lynch CB index cheapened to 0.52%.  There was no new issuance.

“Long positions in gold have been a key source of profits for hedge funds this year.  Despite the strong performance this year, managers continue to be bullish on gold,” commented Charles Gradante. “As the developed economies approach a period when they cannot issue new debt and cannot raise taxes, the only option is to print money, which is bullish for gold.”

The Hennessee Global/Macro Index declined -2.91% in August (-3.07% YTD).  Negative macroeconomic data, widening sovereign credits in Europe, and the S&P downgrade of U.S. debt drove markets lower and set an extremely negative tone for the month.  Financial markets across the globe declined with the MSCI All-Country World Index falling -7.53% in August (-6.05% YTD).  Europe was hit especially hard as the Euro Stoxx 50 ended the month down -13.8% and was down -22% at its month low.  International hedge fund managers experienced losses as the Hennessee International Index declined -5.97% (-4.43% YTD). Emerging markets also fell as the MSCI EM Index declined -9.19% (-10.27% YRD).  Hedge fund managers outperformed as they were positioned cautiously with the Hennessee Emerging Markets Index falling -3.30% (-2.18% YTD).  Managers remain optimistic on emerging markets long term as many have stronger balance sheets, higher growth, and increasing consumption.  The Hennessee Macro Index was one of the best performing indices, advancing +0.60% in August (+0.11% YTD). The flight to quality resulted in losses to almost all asset classes except for precious metals.  Gold was a top performer in August, up +12.2%, while silver (+4.2%) and platinum (+3.7%) also performed well.  In terms of currencies, the conflicting headwinds of greater risk aversion versus the U.S. downgrade by S&P resulted in the U.S. Dollar remaining largely range bound in August (+0.3%).  Managers did experience losses in their long Swiss Franc positions on intervention by the Swiss National Bank.  Oil was also weak given the fears around slowing global growth and pending resolution of the Libyan civil war.

* For a more in depth monthly review of the economy, capital markets, and hedge fund performance and strategies, the Hennessee Group offers the monthly Hennessee Hedge Fund Review (www.hennesseegroup.com/hhfr/ <http://www.hennesseegroup.com/hhfr/> ).

By Ron Suber, Merlin Securities — The business landscape has changed dramatically for both hedge fund managers and investors as we enter year end and an even greater risk and regulatory environment. In addition, these volatile markets along with a correlated trading cycle has made reliable, automated processes essential components to running an efficient hedge fund. Manual work and reliance on spreadsheets are clear red flags to due diligence teams, current investors and prospective investors.
In this Merlin white paper a Hedge Fund manager can now chart their actual current level of automation and create a process to buy, build or outsource to achieve an automated solution.

Guest post from Hennessee Group.

HEDGE FUNDS DECLINE -0.25% IN JULY

Hedge Funds Protect Capital as Markets Decline

August 9, 2011 – New York, NY – Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.25% in July (+1.41% YTD), while the S&P 500 declined -2.15% (+2.75% YTD), the Dow Jones Industrial Average fell -2.18% (+4.89% YTD), and the NASDAQ Composite Index decreased -0.62% (+3.90% YTD).  Bonds rallied amid the volatility, as the Barclays Aggregate Bond Index advanced +1.59% (+4.37% YTD) and the Barclays High Yield Credit Bond Index advanced +1.16% (+6.20% YTD).

“With defensive positioning and low exposures, hedge funds were able to protect capital as the equity markets sold off in July amid concerns about economic growth and the political impasse around the U.S. debt ceiling,” commented Charles Gradante, Co-Founder of Hennessee Group.  “In July, there was better dispersion and lower correlations among securities as companies started to report Q2 earnings, which allowed managers to generate alpha on long and short portfolios.  However, we have seen a spike in correlation and massive de-risking in early August, which will likely prove challenging for hedge funds in the short term.”

“It has been a challenging year with several episodes where hedge funds had the potential to be ‘whipsawed’ by sharp reversals between risk-on and risk off periods,” commented Lee Hennessee, Managing Principal of Hennessee Group. “For the year, hedge funds are modestly positive, underperforming most traditional benchmarks.  Hedge funds have been willing to sacrifice upside participation in order to be more cautious and defensively positioned.  This will hopefully benefit managers in August as the markets are experiencing a sharp and painful correction in risk assets.”

Despite gains early in the month, the S&P 500 ended July down -2.15% due to the political debate around the U.S. debt issue.  The worst performing sectors were industrials (-7.02%) and telecommunication services (-6.67%).  The only sectors positive for the month were information technology (+1.57%) and energy (+0.64%).  The Hennessee Long/Short Equity Index declined -0.55% (+2.23% YTD) in July, its third consecutive negative month. While macro headlines were largely negative, companies reacted strongly to earnings and reports of forward guidance.  According to S&P, over 70% of the index members either posted a gain or doubled the index decline of -2.15%.  This significant dispersion was a benefit to stock pickers, allowing managers to generate alpha. In addition, managers are encouraged by the fact that second quarter earnings were strong.  While Q3 and Q4 estimates are still expected to be record highs, managers are a bit concerned that expectations are too high. However, despite these positive developments, managers are cautious and have been reducing exposures over in recent months due to the macro headwinds and increased volatility.

“In an effort to reduce risk, investors are piling into government bonds and selling risk assets, such as equities and commodities. This has been the ‘typical’ risk-off trade for the last 18 months,” commented Charles Gradante.  “However, investors are not appreciating the real risk in Treasuries.  It is really not attractive to buy Treasuries at 2.6% and be repaid in dollars that will be worth significantly less in ten years.”

The Hennessee Arbitrage/Event Driven Index declined modestly in July, falling -0.22% (+1.85% YTD). Fixed income benefited from a flight to quality as investors piled into bonds and yields dropped significantly.  U.S. Treasuries experienced significant gains in July.  In addition, the U.S. corporate credit markets performed well during July as the S&P/LSTA Leveraged Loan Index gained +0.2% and the Barclays High Yield Credit Bond Index advanced +1.16%.  Prices benefited from investor inflows, U.S. Treasury bond performance and improved corporate earnings. The Hennessee Distressed Index decreased -0.91% in July (+3.85% YTD). Some benefited from position specific catalysts, such as an asset sale by Nortel Networks, but in general, portfolios declined as the market sold off and investors reduced risk.  The Hennessee Merger Arbitrage Index declined –0.87% in July (+1.84% YTD). Spreads widened and managers experienced losses, specifically in the media sector.  The Hennessee Convertible Arbitrage Index returned -0.33% (+2.60% YTD) in July.    The U.S. convertible market sold off as the Merrill Lynch CB index cheapened by 70 basis points to 28 basis points cheap in July, a level not seen since October 2009.

“Managers reported that one reason for earnings slowdown in global growth companies is that margins have been shrinking in emerging markets, which are not providing the bottom line growth as originally expected,” commented Charles Gradante.  “Competition is greater than anyone expected. The supply from competition outpaces demand putting pressure on margins for all G-7 exporters.”

The Hennessee Global/Macro Index advanced +0.43% in July (-0.94% YTD).  Global markets staged a brief rally during the beginning of the month, but retraced to post losses for the month, with the MSCI All-Country World Index falling -1.72% in July (+1.59% YTD).   International hedge funds outperformed due to superior stock selection and conservative positioning, as the Hennessee International Index posted a gain, up +1.04% (+1.58% YTD).  Emerging markets outperformed their developed counterparts.  In July, the MSCI EM Index declined -0.74%, as Latin America was one of the worst performing regions.  Hedge fund managers were up modestly, as the Hennessee Emerging  Markets  Index  advanced +0.44%  -0.03%  YTD), benefiting from positive contributions from Asia, Russia and other emerging markets.   The Hennessee Macro Index was positive, rising +0.62% for July (-2.05% YTD). Managers generated gains in fixed income, short the U.S. dollar, and long commodities, including precious metals, oil and agricultural commodities.  Every major S&P GSCI commodity sector increased in July.  Precious metals were the top performing sectors, up +9.5% on a weaker U.S. dollar and concerns about the global economy.  Silver was the best performing commodity in July, up +13.2%.  Gold ended the month at a new high, closing at $1,629, as investors sought to avoid paper currency.

* For a more in depth monthly review of the economy, capital markets, and hedge fund performance and strategies, the Hennessee Group offers the monthly Hennessee Hedge Fund Review (www.hennesseegroup.com/hhfr/<http://www.hennesseegroup.com/hhfr/> ).

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About the Hennessee Group LLC <http://www.hennesseegroup.com/>

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 <http://www.hennesseegroup.com/indices/index.html> ® 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. For additional Hennessee Group Press Releases <http://www.hennesseegroup.com/releases/index.html> , please visit the Hennessee Group’s website.  The Hennessee Group also publishes the Hennessee Hedge Fund Review <http://www.hennesseegroup.com/hhfr/index.html>  monthly, which provides a comprehensive hedge fund performance review, statistics, and market analysis; all of which is value added to hedge fund managers and investors alike.

Guest Post: Holly Singer, President of HS Marketing, a firm dedicated to helping firms in the alternative investment community achieve lasting impressions, contributes with to The Final Meeting with marketing advice for hedge fund managers and service providers.

Personal relationships with eye-to-eye contact may be considered so important to building trust that our clients often dismiss opportunities to use email and other forms of electronic investor communication. Your marketing tool kit may need a refresh or re-interpretation.

In this eletter we suggest ways to enhance your client relationship management — not by substituting electronic communication for human contact, but rather by enhancing your offline relationships with new tools. We are all constantly reminded that we live in “the digital age,” yet many firms in the funds management and the service provider space leave an opportunity on the table by failing to employ current, legitimate marketing technologies that complement and enhance brand building efforts. Eschewing emarketing today is as inefficient as calculating NAVs manually.

Our strategic partner Glenn C. Devitt, principal of Online&, offers tips, traps and trends surrounding this critical element of marketing communication objectives.

The Trend: Adapting to New Tools
We recognize that a certain portion of your investors and prospects may prefer personal contact exclusively. But as younger generations mature, managers and marketers who do not adopt new tools will be perceived as being out of touch and behind the times — an image you can ill afford. Don’t mistake stubbornness for tradition. Perhaps you haven’t tested whether new tools may help your marketing objectives, but it’s easy and inexpensive to do so.

Trap #1: Well known emarketing tools that we do not suggest for fund managers:

• Facebook (unprofessional)
• Twitter (frenetic and impersonal)
• Bulk mail to strangers (untargeted and noncompliant with industry regulations)
• Purchasing commercial marketing lists (unseemly and probably ineffective)

Trap #2: Popular eblast options may be abundant yet unsuitable.
Be careful about which of the many ecommunication platforms you choose. Some popular options are best suited to general, bulk email. These include ConstantContact, Emma, and MailChimp. We do not recommend them to our clients in the alternative investment industry, because they do not integrate well with specialized customer relationship management (CRM) database systems that support broader marketing goals. Which leads us to:

Tip #1: Employ targeted and selective email approaches.

• Send monthly email communication to clients and prospects. Even if you call each client regularly, you should also send them a brief email that reflects your firm’s branding elements, and contains links to your firm’s current performance information and investment commentary on your secure website. Many people receive email more quickly than voice messages, and will appreciate that you communicate with them in multiple ways to suit their schedule.
• Prepare occasional special messages to address hot topics, such as a sudden market shift or unusual performance factors. Making numerous phone calls to investors is very time-consuming; smart investment managers leverage technology to send important updates to a group of investors in a few seconds.
• Limit your emarketing to pre-qualified investors and prospects. Play it conservative to avoid running afoul of regulatory restrictions. Your email lists should only include people with whom you already have a documented relationship. Check with your legal/compliance advisor before proceeding.
• Grow your personal network via LinkedIn. With this service you can discover first- and second-degree links to people with whom you might want to do business, and find out who you know in common. However, be careful to avoid marketing specific investments or funds via LinkedIn and as noted above, avoid non-compliant use of social media.

Tip #2: Integrate your CRM system.
Adopt an ecommunication platform that will integrate with your existing CRM system. This avoids having multiple databases that must be maintained independently. Third-party service providers such as Backstop, PerTrac, and SalesForce provide differentiated services for integrating all of your CRM tasks.

We invite your inquiries about what solution can help you achieve better investor communication, take advantage of easily accessible marketing technologies, integrate your existing CRM system, and do it all at a cost that fits your firm’s budget. If you haven’t already taken advantage of some of these tips and opportunities to update your marketing tool kit, drop us an email. We’ve been in the marketing communications business, serving the alternative investment community, for almost two decades.

Sincerely,
Holly Singer, President
HSMarketing, LLC
www.hsmarketing.com
Princeton Junction, NJ 08550 | tel. 609.275.1303