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From Kirsten Bischoff, Opalesque New York:
Hedge fund performance in 2010 was, by and large, nothing extraordinary. With the Dow Jones Credit Suisse Hedge Fund Index ending the year at +10.95% (lagging the S&P 500’s +12.78%), many investors are left wondering about the “alpha” that hedge fund managers promised to deliver.
“After you have big, directional moves in the stock markets, it invariably follows that you will see an article that says, ‘hedge funds performed extremely well’”. It’s really pretty basic to understand why that is – hedge funds, and funds of hedge funds have varying levels of embedded beta exposures” says Scott Franzblau, Principal at $2bn fund of hedge fund firm Benchmark Plus Management.
Currently, beta correlations in hedge funds are on the rise (as is use of leverage increasing the potential for harm if a correction or reversal strikes). Bank of America Merrill Lynch reported to clients this week that not only are hedge funds more correlated to stock market performance, but “compared to the three year history, the magnitude of correlation [amongst hedge fund strategies] has increased. In other words, there are less diversification benefits by investing in different strategies now.”
While in rising markets there is a benefit from market beta exposures, during corrections or reversals, beta correlations quickly become something managers want to distance themselves from. ...................... To view our full article Click here
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