Hedge funds sank further in September

September wasn't good for hedge funds, but the alternative strategies on average still managed to outpace the broad equity market indexes, according to the latest report from Hennessee Group LLC. The Hennessee Hedge Fund Index declined by 3.8% last month, extending to five months the negative streak and leaving the index down 5.5% from the start of the year. The S&P 500, meanwhile, lost 7.2% last month, also extending its slide to five months. It is down about 10% from the start of the year. “September was another challenging month for hedge funds, capping one of the worst performance quarters in history, largely driven by increased European sovereign-debt risk and not declining domestic equity fundamentals,” said Hennessee Group co-founder Charles Gradante. Among the hedge fund index's 23 subcategories, short biased was the only one to produce a positive return last month with a 5.8% gain. The short-biased category is up about 9.7% from the start of the year. The three other subcategories that were positive through the first nine months of the year are market neutral (up 2.9%), high yield (up 3.8%) and fixed income (up 1.8%). The Barclays Aggregate Bond Index, which gained 0.7% last year and is up about 6.7% year-to-date, is the only major broad market index in positive territory over the past nine months. “Managers have significantly reduced gross and net exposures in line with increased volatility, resulting in abnormally high cash levels and low net exposures,” Mr. Gradante said. “Managers are looking for market transparency and stabilization before getting reinvested.” The worst-performing hedge fund subcategory so far this year has been financial equities, down about 13.5% year-to-date and 8.2% last month. Other big losers this year include emerging-markets hedge funds (down about 11.8% year-to-date and 7.5% last month), European funds (down about 11.3% and 4%) and event driven (down about 10.6% and 6.1%). “Most sentiment measures are close to March 2009 lows but not quite there,” Mr. Gradante said. “Financial markets are focused on the sovereign-debt crisis in Europe as the macro issue that must be resolved before volatility and negative sentiment will subside.” Email Jeff Benjamin at [email protected]