Chart Of The Day: All Aboard The Beta Train As Correlation Between Hedge Fund Returns And Market Hits All Time Record

Tyler Durden's picture

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.

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TooBearish's picture

Leverage i first?

MillionDollarBonus_'s picture

Very few hedge funds manage to outperform the market, despite the fact that they are professionals. Hence it is very unwise to pick particular stocks to try to beat the big boys at their own game. The smartest thing average investors can do is to invest in a mean-variance optimized equity portfolio, be right and sit tight.

redpill's picture

Good advice, that way your portfolio today would be what it was worth in 1998.


css1971's picture

What you're saying is that we can replace most fund managers with a simple script.


Popo's picture

Script?  No.  You can statistically out-perform the majority of hedgefunds by buying a major index.

Look it up.

falak pema's picture

A mean mean-variance optimized equity portfolio where the standard deviation to fair value is so high that even a fearless, texas bred, country buzzard with noble beak would fly like a zombie bat in dire fright. Sit tight and let your left hand tell your right where he hid the unlawful gains of insider trading in inequitable equity HF triggered transactions; via dark pools of electronic money infested by bare backed, hard fisted, adrenaline pumped, cocaine high, smart assed, first class, incestuously oriented pool sharks, self proclaimed as the blue blooded bretheren of WS squid pump. 

Oh the pink slip blood bath, the night of the long knives at a Hamptons bunga binge turned gory mayhem of fallen hit men. 

But we are anticipating the denouement of a good film like Duel...or is it a western like 'the searchers' where heroes never die?

NotApplicable's picture

You should turn down the Suzy Orman a notch, and maybe concentrate more on the "value" of hedge fund liquiditiy. This ain't Yahoo, after all.

Mercury's picture

This begs the question: are there too many hedge funds chasing too few returns?"

...and how hedged the hedge funds really are.

LawsofPhysics's picture

Methinks that the latter point is actually the bigger concern, but what do I know.

Manthong's picture

If the amount of hedge in a Hedge Fund is zero, what does that portend for its survival rate? 

DeadFred's picture

Wait until the correlation gets over 100% then jump ship.

falak pema's picture

Soon they'll all be posting here as they will be Zero Hedged! 'On a long enuff time line...every HF gets head stuffed'.

abugarance's picture

all good, market up another percent, which seems to be daily rate going eternity and beyond

Archimedes's picture

Market will break 12,000 this week as "Earnings" beat lowered expectations and Europe promises to keep making statements. Everyone who wanted to sell did. Add the "refi" Obummer plan that won't do much but the headline reading algos will love and a better than expected 3rd Qtr GDP reading. The computers will do their melt up into Christmas. Dow 12,700 at around Christmas time. Then short!

GeneMarchbanks's picture

Hedge funds: a dying business. Shocking!

DeadFred's picture

One of my underlying working hypotheses says that when the banks had to ditch their prop desks they went into HFT to accomplish the same thing. Since then there has been a strong motivation to get rid of the competitors so the 'bots can have the market all to themselves. Retail is already gone so the hedgies and day traders are in the crosshairs. The banks sent their SEC lapdogs after the hedge funds for insider trading, doing lesser versions of what the banks got to do with impunity. Without access to high quality info there is no reason for a hedge fund to exist. I don't know how they'll get the daytraders because this volatility must be doing wonders for any day trader who knows what he's doing. For all their speed and power the algos are incredibly predictable. Maybe that's why there's 'concern' about the leveraged ETFs which are the daytraders' favorite playthings. They won't be happy until the 'bots have total control, but why have a markat at all then? Many would say why have one now?

DormRoom's picture

And price distortions from hedgefund leverage continues, only for the taxpaxers to soak up the misallocation, once the liqudity is pulled, and prices adjust back to sustainable long run levels.


Price distortions from short term leverage are relaying false signals in the market, and masking risk.  Once the liquidity dissappears and  prices adjust to re-expose risk, we get disorderly adjustments. broken markets. and broken livellihoods.



buzzsaw99's picture

public money managers who hand over funds to hedgies should be shot.

SheepDog-One's picture

Gonna be tough unloading when there are no buyers out there but except churning pump-bots.

Snidley Whipsnae's picture

SD1... Most of the hedgies are in this boat...

"In any great organization it is far, far safer to be wrong with the majority than to be right alone.
John Kenneth Galbraith"

Belarus's picture

It seems the only unwind happening anywhere in the global economy is short covering. Doesn't matter what is happening, EUR/USD, credit blowing out, whatever.....S + P 500 to the fucking moon! 

mayhem_korner's picture



Dodd-Frank will straighten this out.  /sarc/

Smithovsky's picture

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?

1/300th of 1% on ES.  

Sell and hold.  

Carlyle Groupie's picture

Need some preditory algo's to juice your alpha? It's all the rage.

lizzy36's picture

The funny thing is that from 1994 until 2008 market performance accounted for 15% of hedge fund returns. Since 2008 it has accounted for 70%.

Which begs the question of what idiot is paying 2/20 when one could simply buy SPY and call it a day.

redpill's picture

Assuming you are still participating in this fraud of a stock market.

lizzy36's picture

Here is the beauty about the fraud known as the stock market:it is rigged one way. It has been more so since 2008.

It will absolutley blow up at some point in the next 5-7 years. And this time there will be no rescue. But until then, one can play the game, knowing how it is rigged.

Status quo has a vested interest in staying status quo. In the end, that will be their undoing. The absolute greed and corruption......

Theirs not to make reply,
Theirs not to reason why,
Theirs but to do & die,

spekulatn's picture

"....alpha is now officially dead."


Nuff said.

falak pema's picture

next step : we all sink together.

PD Jim asks HF Joe :

"Joe, Do you have your life jacket?"

"Nope Jim, I'm a Hedge Funder, no life jacket, no golden parachute! Yikes!!!"

RobotTrader's picture

Bears are getting destroyed again.

Cyclicals like CAT and materials like FCX way too strong today.

WikiLeaks has been shut down, so no more "rumors" about a BAC blowup.

Assange is probably going to have to go back into the porno industry, just to survive.

JPM Hater001's picture

At 12K I am shorting the world.

raki_d's picture

Tyler works for a secret hedge fund too, called Mayhem

Dollar Bill Hiccup's picture

It's almost all levered BETA because that's what the game demands.

Anyone who has time, money and patience can really knock the socks off the ball.

Hardly anyone has all of the above in the HF space and everyone is chasing MOMO.

The folks at the pension funds are eating fine steak dinners, so they are ok with it.

Just look at HF returns in 2008 and into 2009. Hedged? Yeah, right.

El Viejo's picture

Like Minsky said, too much money in the market destabilizes it. LTCM redux. This next wave down will weed out the unprepared and faint of heart.

babylon15's picture

Don't blame hedge funds, blame central banks. The Federal Reserve is leveraged 55 to 1. The Bank of Japan is leveraged 50 to 1. European Central Bank is leveraged 25 to 1. Swiss National Bank lost over $40 billion placing losing currency bets.

In fact the US Federal Reserve has more liabilities than all the hedge funds in the world combined. And while it took hedge funds nearly 30 years to get there, it took the Federal Reserve only 2. And while hedge funds use a variety of strategies, some in contradiction to each other, the Federal Reserve uses only one strategy - long bonds.

Ura Bonehead's picture

"Hedge Fund 1-year rolling correlations to the S&P 500 are at historic highs...."

What's always left out of these discussions is a basket of considerations including fund 'survivor bias' and reporting errors (intentional - funds don't report performance when they're getting hammered).  Additionally, the issue of leverage and beta.  Don't forget that HFs use extensive leverage (risk) to generate nothing more than S&P-like correlation.  If someone told you that the odds of going to Vega were that (on the upside) you would merely get you money back then, actually, you might be happy b/c you know the risks of that happening are rare - you understand beta and volatility.  That never comes-up in HF discussions.