Hennessee Group LLC, a consultant and adviser to direct investors in hedge funds, announced today that the Hennessee Hedge Fund Index gained +88.30% over the last decade (January 2000 to December 2009), while the S&P 500 declined –23.33%, the Dow Jones Industrial Average fell –9.30%, and the NASDAQ Composite Index declined –44.24%.
“With one of the most challenging decades coming to a close, I feel hedge funds performed admirably,” said Mr. Gradante, Co-Founder of Hennessee Group . “It is very clear to the Hennessee Group that the hedge fund strategy is here to stay and that allocations to hedge funds should be increased as the next decade will have even more severe risk issues to deal with then the past decade.”
“There has been a lot of talk about the ‘lost decade’ for stocks [referring to the fact that investors lost money in stocks over the last decade]. However, there has not been much said about the performance of hedge funds,” said Mr. Gradante. “While stocks actually declined in value at an annualized rate of -2.62% per year [for the S&P 500], hedge funds posted an annualized positive return of +6.54%.”
“Not only did hedge funds outperform stocks on a relative basis by more than +9% per year versus the S&P 500, they did so with significantly less volatility,” said E. Lee Hennessee , Managing Principal of Hennessee Group. “Hedge funds exhibited a standard deviation of 6.8% over the last decade while the S&P 500 had a standard deviation of 16.1%.”
In analyzing the performance of the Hennessee Hedge Fund Index, the ability to outperform over the past ten years was in large part due to the ability to minimize drawdowns. The Hennessee Hedge Fund Index experienced only two down years (2002 and 2008), while the S&P 500 had four down years (2000, 2001, 2002, and 2008).
This is also evident when analyzing the monthly returns of the Hennessee Hedge Fund Index versus the S&P 500. In months when the S&P 500 generated a positive return, hedge funds were able to capture slightly more than 50% of the upside (+1.6% for the Hennessee Hedge Fund Index versus +3.0% for the S&P 500). In months when the S&P 500 declined in value, hedge funds only participated in -20% of the loss (-0.8% for the Hennessee Hedge Fund Index versus -4.2% for the S&P 500). This ability to protect capital in the down markets allowed hedge funds to average a positive monthly return of +0.5%, while the S&P 500 declined in value at an average monthly rate of -0.1%. This helped hedge funds compound higher absolute returns relative to traditional equity benchmarks with less volatility.
“This down market analysis demonstrates that you do not need to outperform in up months in order to outperform,” said Mr. Gradante. “The most value-added characteristic of hedge funds is their down side risk management, which is really where they generate alpha.”
By selecting either the top performing hedge fund strategies or by selecting the top performing hedge fund managers, investors were able to outperform the overall Hennessee Hedge Fund Index and other benchmarks by a significant margin.
The top performing strategies over the past decade were: 1) Financial Equities funds, which performed well in 2008, as they were able to foresee many of the financial problems and generate gains shorting, and well in 2009 participating in a sharp snapback; 2) Healthcare and Biotech funds, which posted outsized years in 2000, 2003 and 2009; and 3) Distressed funds, which posted strong performance after default cycles in 2003, 2004 and 2009.
This analysis also demonstrates the need for experienced hedge fund manager selection. An average hedge fund that performed in the top half of the Hennessee Hedge Fund Index each year over the past ten years significantly outperformed a hedge fund that performed in the bottom half.