A Q2 Meltdown

Using words like “violent,” “extreme,” and “unpredictable,” Hennessee Group LLC principals Charles Gradante and Lee Hennessee struggled to describe the staggering September losses experienced by the hedge funds their firm tracks in its Hennessee Hedge Fund Index.

As a whole, the index fell 6.24% in September, its biggest one-month decline in more than a decade. Arbitrage and event-driven managers fared the worst, losing 6.38%, but the red ink was by no means confined to one area. Every single strategy the Hennessee index follows except for short selling lost money in September. Long/short equity managers were down 5.86%, while global/macro managers lost 5.93%.

For the year, hedge funds in the Hennessee index were down 10.28% through Sept. 30–not nearly as bad as the negative 20.57% year-to-date performance of the Standard & Poor’s 500 stock index, or the negative 18.2% recorded by the Dow Jones Industrial Average, or the negative 21.51% earned by the Nasdaq Composite Index–but not exactly what hedge fund investors had in mind when they sought out and paid for “absolute returns.”

The Effects of Short Selling Ban

“Hedge funds have outperformed on a relative basis year-to-date,” said Hennessee, managing principal of the eponymous firm, in a news release. “Violent theme reversals, extreme volatility. and unpredictable intervention have contributed to negative performance.”

Part of that “unpredictable intervention,” no doubt was the global ban on short selling that went into effect in August, designed to boost markets by preventing bets against certain stocks, mostly in the financial sector. In that it was perhaps a marginal success, although it didn’t exactly halt the downward spiral of equity prices. And it had other, more far-reaching effects.