Merger, Convertible Arbitrage to Increase Gains in 2005

January 19, 2005 ( - Merger and convertible arbitrage profits will rebound in 2005 while distressed debt and credit related strategies will bring lower returns, according to hedge fund investment advisor Hennessee Group.

According to a new study released by the group, long/short equity and convertible and merger arbitrage will show increasing gains in 2005 after mediocre years in 2004 due to rising interest rates, increased volatility, higher convertible bond issuances, increased merger activity and a rising equity market. Convertible arbitrage profits should be around 6%, according to a company press release, while returns from merger arbitrage strategies should be around 8%.

Looking back on 2004, these strategies did not do as well as is expected in the coming year, with convertible arbitrage returning a dismal 1.2% and merger arbitrage returning 4.5%. Long/short equity strategies retuned an average of 8.4%, a number still below the S&P 500s 10.9% return. Overall, it wasn’t a great year for hedge funds when compared to the equity markets, with the Hennessee Hedge Fund Index returning 8.3% in 2004.

Distressed debt, a strategy that is supposed to see moderate returns in 2005, outperformed most other strategies last year, retuning 18.5% in 2004.

Hennessee attributed 2004’s lackluster hedge funds returns to conservative net exposure due to uncertainty surrounding Iraq and the election, as well as low volatility, low interest rates, narrow trading ranges on equities, and a high correlation and low dispersion of returns among stocks.

More information about the company can be obtained from  The Hennessee Group .