For anyone debating whether or not it makes sense to pay some hedge fund manager 2 and 20 to "actively" manage their money, we have the definitive answer: no. As the following chart from BofA's Mary Ann Bartels demonstrates, the correlation between 1 Year rolling returns for the HF community and the S&P just hit an all time high of just under 100%! In other words, alpha is now officially dead - the only strategy left in a world in which all phone conversations with "expert networks" are bugged, and where hedge fund managers actually go to jail for insider trading, is chasing beta. The more levered the better. Which explains not only the dramatic surge in market vol in the past several months as the entire "hedge fund hotel" shifts from one side of the boat to the other at the same time to catch the next wave, but that anyone deluding themselves that there is any alpha left in this market which is now entirely controlled by the central planning authorities, should probably reassess their strategy. Bartels puts it most succinctly: "Hedge Fund 1-year rolling correlations to the S&P 500 are at historic highs. Sustainable high correlations to the equity market have not been a typical pattern. This begs the question: are there too many hedge funds chasing too few returns?" The answer is all too obvious, and absent something changing dramatically very soon, we believe this is the beginning of the great unwind for the nearly $2 trillion in AUM held by Hedge Funds, and their transition to passive strategies. After all why pay at least 20% of any upside, when one can hand over less than 1% in transactions costs to the SPY or ES or any of the 8 trillion other ETFs peddled by Blackrock?
And those curious if there is any strategy that is not nearly 100% correlated to the S&P, we have the answer:
Currently Merger Arbitrage strategy has the highest 1-yr correlation with S&P 500. Macro and Managed Futures have lowest correlation (besides short biased), although their correlation has grown noticeably.
Said otherwise: no. Check the chart below.