Hedge funds continue to outperform global equity markets, which have seen a 20% decline from their peak in October, while the alternatives vehicles have delivered 0.15%, according to the Hennessee Long/Short Equity Index. Hennessee Group, an advisor to hedge fund investors, said equity markets have entered a 'technical' bear market while hedge fund money managers have successfully protected capital in a severe and volatile down market - partly due to hedging and the adjustment of gross and net portfolio exposures with respect to market movements. According to latest research data from Hennessee, money managers in an environment of increasing volatility and uncertainty have reduced their risk appetite and reallocated investments to cash and less risky assets - this has emerged as a relatively old story over the first year of the credit crunch.

Hennessee said its research indicates the average net exposure of long/short equity hedge funds decreased by 16% over the past year, from an increase of 52% at the end of the second quarter 2007 to 36% in the second quarter of 2008. Hennessee said, in reviewing past exposures levels, that they peaked at the end of the second quarter - just prior to the S&P 500's highest close in 2007. As the broad market began to decline amid credit turmoil, net and gross exposure levels also started to decrease, Hennessee said.