NEW YORK (HedgeWorld.com)–Hedge funds in the Hennessee Hedge Fund Index improved their performance in February but still trailed key equity indexes for the month.

The overall Hennessee index rose 1.36% last month, rebounding from a negative 0.29% start in January. But the Standard & Poor’s 500 Stock Index (2.1%) and the Dow Jones Industrial Average (2.63%) both outpaced Hennessee Group LLC’s hedge fund index.

Nevertheless, the overall Hennessee index is ahead for the year when January performance is factored in. For the first two months, the Hennessee index is up 1.07%, while all key equity market indexes have turned in negative performance thus far, despite the boost they got in February.

Leading the way in February–and for the year–are short-biased managers. That strategy returned 6.37% in February despite the equity market rally and is up 12.64% so far in 2005. Second-best in February were managers concentrating on Latin America. They returned 3.6% last month but for the year are up only 0.13% due to a negative 3.35% return in January.

The Hennessee Global/Macro Index earned 2.59% in February, thanks in part to a declining U.S. dollar, rising gold prices and a sell-off in the U.S. Treasury market, according to Hennessee Group officials. Inflation worries drove the Treasury selling in February.

Long/short equity managers in the Hennessee index earned 1.18% in February, boosted by rising equity prices. Charles Gradante, managing principal of the Hennessee Group, said long/short equity managers increased their net long exposure as they gained confidence in the economy and stock fundamentals. That confidence went only so far, however.

“Equity hedge fund managers have reported to Hennessee that unlike 2003 and 2004, stock prices are reacting more in line with fundamentals,” Mr. Gradante said in a statement. “Equity managers, however, are reluctant to increase their moderate net long exposures [of between 40% and 50%] to the equity market for fear that 2005 performance may struggle within a trading range.”

Looking ahead through the rest of the year, Mr. Gradante said he is encouraged by signs that point to some moderate de-leveraging by hedge funds. That will likely lessen the effect on the industry of any further interest rate increases. “Any financial crisis that usually is associated with most monetary tightening is likely to come from non-hedge fund futures managers who have increased leverage in currency, commodity and financial futures trading,” Mr. Gradante said.

CClair@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com”>.