Bridgewater CEO Ray Dalio was in the news again last week with this New York Times story on his concerns over the “high correlation” between hedge funds and the S&P500 during the past few years.  (Hat-tip to Greg Newton of Naked Shorts for the heads-up as we were “WiFi-ing” around Canada last week).

Hedge fund replication researchers say that the heterogeneity of hedge fund strategies is diluted when hedge funds are analyzed as one aggregate mass.  They say that, overall, hedge funds can be replicated (or at least approximated) by the S&P 500.  However, they also say that sub-strategies are far more difficult to replicate using a simple long position in any broad equity index.

According The Times, Dalio essentially says the same thing in a recent private letter to investors - that hedge funds, overall, have a relatively high correlation to the S&P 500.  (But at 0.6-ish range, not nearly as high as mutual funds).  On an individual substrategy level, Dalio points the finger at long/short equity (0.84 correlation to the S&P 500 over the past 24 months).  But the Times makes no mention of the correlation between other strategies and the market (e.g. market neutral).

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