NEW YORK (HedgeWorld.com)–In a month that saw mixed performance from the broad equity market indexes, the Hennessee Hedge Fund Index posted a 1.8% increase for December, beating the Standard & Poor’s 500 stock index, the Dow Jones Industrial Average and the Nasdaq Composite Index.

The Hennessee Global/Macro Index led the field with a 3.04% increase for the month, bolstered by the rising Japanese Nikkei stock index and strong performance from commodities such as oil and gold. Charles Gradante, managing principal of Hennessee Group LLC, noted that macro hedge fund managers also profited by staying short on U.S. dollar and credit spreads, as the yen and euro rose against the dollar. The index finished up 14.27% year-to-date.

Comparatively, the S&P 500 increased 0.04% in December, finishing up 8.03% year-to-date; the DJIA lost 0.82% and finished negative 0.61% year-to-date; and the Nasdaq lost 1.23% for the month but was up 1.38% year-to-date. Bond markets increased in December, with the Lehman Brothers Intermediate Government Corporate Bond Index growing 0.63% for the month and 1.57% year-to-date.

“Hedge funds as an asset class outperformed equity and bond markets for December and the year,” said Hennessee Group Managing Principal E. Lee Hennessee in a statement. Ms. Hennessee also said that the Federal Reserve has so far overseen “the most effective withdrawal of monetary stimulus since the 1980s,” and that equity hedge funds reaped the benefits as stock research trumped liquidity-driven markets, “for the first time in several years.”

Despite an expected “December rally” that equity markets never saw, the Hennessee Group reported that its Long/Short Equity Index grew 1.51% for the month, and 6.98% year-to-date. According to the Hennessee Group, long/short managers in the index are optimistic about possibilities for large-cap stocks in 2006.

Arbitrage and event-driven managers also finished the month and year in positive territory, returning 1.33% for December and 5.3% year-to-date. Though the month ended with embattled convertible arbitrage managers holding on to a 1.06% increase, the strategy finished 2005 down 2.2%; it was the first negative year for convertible arbitrage since 1994, according to Hennessee Group figures, but it was enough to make it the worst-performing strategy in the index this year.

Managers in the merger arbitrage category had only a slightly better yuletide, with a 1.1% return, but a much better year, with a 4.79% increase for 2005. Distressed managers were the best-performing of the lot with a 2.27% gain in December following the performance of airline bonds and the announcement of a new chief executive at Calpine.

“With a flat yield curve, low volatility and tight credit spreads, arbitrage managers did not have much to work with,” said Mr. Gradante in a statement. “Many arbitrageurs believe inflation is more likely to surprise on the downside in the coming months. These same managers reminded us that the yield curve inverted in 1995 and 1998, signaling absolutely nothing.”

December was among the best months of 2005 for the Hennessee index–only July brought higher returns (2.26%). The index found itself in negative territory four months this year, with three of those months (January, March and April) occurring early in the year and only one down month (October) in the second half; the worst month was April, which brought a decline of 1.61%. In November, the index was up 1.51%.

JBunge@HedgeWorld.com

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