Introducing the New 2-and-20 Index Funds

Nov 27th, 2011 | Filed under: Alpha Strategies, Hedge Fund Industry Trends, Hedge Fund Strategies, Today's Post | By:
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You’ll be cheered to know that Morgan Stanley analyst Adam Parker just reported that equity hedge fund correlations to the S & P 500 are now close to 90%, and that the spread between hedge fund returns and S & P 500 returns on a five-year basis is now negative.

This is another way of saying that it’s awfully hard to tell the difference between returns of an equity hedge fund and an index these days.  That may not matter so much for hedge funds with talented marketers or annual meetings in exotic locations.  But for the plebeian hedgies, regression to this particular mean exposes them to Ricky Ricardo’s time-honored observation:  “You got a lotta esplainin’ to do.”

The obvious question is whether the migration towards index-like returns is a reflection of a movement away from hedged portfolios.  And for the moment, the question may have an intuitive answer, but not a demonstrable one.  A certain type of fund disclosure heretofore has not been forthcoming:  namely, reporting on hedge funds’ position levels.  For the moment, there is no substantive data that would support the notion that hedge funds are really hedge funds.  It may simply be a question of definition, depending on whether a hedge fund is a hedge fund because of investment strategy, or manager compensation strategy.

For the moment, it’s hard to explain such a close correlation with the S & P 500 unless funds have been gradually morphing into long-only funds.  Which, ironically, may now be reasonably considered alternative investment strategies. More…

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Author Bio:
Doug Friedenberg has a knack for taking esoteric financial topics and rendering them merely obscure. He is principal of www.jigsaw-capital.com, which arranges asset-based finance for small and mid-sized businesses.

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  1. [...] is how uninteresting the group has become.  That alone argues for a performance renaissance.  Email This Post      Print This [...]

  2. Interesting post, thanks. Do you have the name of the Morgan Stanley report you mention in your post?

  3. This was where we picked up on the story: http://blogs.wsj.com/marketbeat/2011/11/21/hedge-funds-kiss-their-alpha-goodbye/.

  4. Thanks for the kind update. The note is from 11/20 and called “Important Dynamics and a Strategy to Outperform” | US Equity Strategy

  5. If the number of fishes in the pond is getting bigger (hedgies) and the pond (available alpha) is getting smaller, I guess it’s not going to be a good fishing season…

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