NEW YORK (HedgeWorld.com)–Hedge funds tracked by the Hennessee Hedge Fund Index declined 0.23% in June, lagging broad equity market indices in a month best described as lackluster.

The Standard & Poor’s 500 stock index gained 0.14% for the month while the Dow Jones Industrial Average fell 0.16% and the Nasdaq Composite Index fell 0.31%. Bond markets, represented by the Lehman Brothers Intermediate Government Corporate Bond Index, rose 0.15%.

So far in 2006, the Hennessee index remains up 5.65%; the S&P 500 has returned 2.71% year-to-date, the Dow Jones Industrial Average, 4.04%.

Hedge funds’ underperformance could be attributed to a slow reaction to a shift in volatility from 24 to 13 for the VIX volatility index, according to E. Lee Hennessee, managing principal of Hennessee Group LLC. She credited event-driven strategies such as distressed (up 8.35% year-to-date), merger arbitrage (up 8.31% year-to-date), and private investment in public equity (PIPEs)/private financing (up 8.44% year-to-date) with balancing portfolios.

Funds in the Hennessee Arbitrage/Event Driven Index returned 0.3% in June, boosting year-to-date performance to 7.09%. Merger arbitrage managers returned 1.51% for the month as they enjoyed the third busiest quarter of merger activity since 1985, according to Hennessee, with worldwide mergers and acquisitions totaling approximately $916 billion. Convertible arbitrage managers added 0.14% to their 6.53% year-to-date results, while distressed funds slipped with a loss of 0.32% for the month as credit spreads widened and negated gains earlier in the month.

The Arbitrage/Event Driven Index returned 0.55% in May and has been positive all year.

Hennessee’s Long/Short Equity Index continued to slide in June with a 0.35% decline, an improvement on its ?? 1/2 1.62% performance in May. Many long/short managers took up defensive postures at the beginning of the month, and as a result missed out on an end-of-month rally after the Federal Reserve’s June 29 interest rate meeting, according to Hennessee.

“Equity markets ended June where they began, resulting in an uneventful month for long/short equity funds,” Charles Gradante, managing principal of Hennessee Group, said in a statement. “However, volatility traders who were short volatility during June performed well.” Most managers continue to view corporate fundamentals positively and do not foresee a bear market, according to the firm.

Global/macro managers saw a 0.65% decline in June, bringing that index’s year-to-date return to 3.86%. The Hennessee Group cited a rate-tightening trend across major central banks, while metal prices fell as speculative money moved elsewhere and the euro continued to rise against the U.S. dollar.

“Many macro managers bet on a 50 basis point rate hike and were long the dollar as a trade in June only to lose money and were forced to reverse their position,” Mr. Gradante said. “Metal markets were bearish during June while oil futures approached $75. Both of these markets were inconsistent with most macro portfolio bets.”

Last month, Hennessee reported its hedge fund index declined 1.15%; the index hasn’t seen positive territory since April, when it reported a 1.53% gain.

JBunge@HedgeWorld.com

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