The Wall Street Journal’s MarketBeat just ran an article noting that hedge funds as a whole now exhibit a high correlation to equities and actually have a negative alpha - risk adjusted return relative to the S&P 500.
I don’t think either higher correlation or negative alpha matter, and here’s why:
- The graphs in the article go back to 1995. Since 1995 I would be willing to wager the total number of hedge funds and the assets hedge funds hold have risen by a large amount.
- The greater the assets the closer hedge funds will resemble the market.
- More hedge funds means the greater likelihood there will be more underperforming mangers, resulting in lower alpha.
- I am sure the numbers are similar for the mutual fund universe, but that doesn’t mean quality mutual fund managers don’t exist.
- Hedge funds have various disciplines (e.g. Macro, Convertible Arbitrage, Long/Short, Long Only, etc.) and each discipline probably has different correlation and alpha numbers.
Ultimately at the end of the day picking the right hedge fund manager or any manager that compliments your portfolio is the decision that needs to be made.
Maybe after doing your due diligence you discover the manger mirrors the market, or the fees are too high, or you don’t like the illiquidity; however, deciding against using a single manager because the universe as a whole isn’t performing up to standards shouldn’t be a large part of this decision.
