Uncorrelated Correlated Hedge Funds

Gosh, hedge funds are considerably more correlated than their promoters have pitched:

They’re all backing the same trades, behaving like index-
tracking mutual funds. Instead of convincing investors that the
only way to make 50 percent in a year is to be willing to lose 20
percent in a quarter, they eke out profits by retiring winning
trades almost as soon as they are in the black. Instead of
scouring the globe for unidentified gems, they spend their time

“The correlation of hedge-fund returns is very worrying,”
said Donald Sussman, chairman and founder of Greenwich,
Connecticut-based Paloma Partners Management Co., who spoke at a
panel discussion in a tent at the festival. “Everyone does well
in a bull market, and badly in a bear market.”


  1. Franklin Stubbs says:

    The hedge fund biz is like many others in that the flash of easy money attracts plenty of dolts and con men. A lot of the so-called hedge funds out there are little more than elaborate scams designed to take advantage of the unprecedented sea-of-liquidity environment we had been in for the past few years.
    One of the more popular rackets, for example, was selling volatility–you write naked S&P puts and collect fat premiums of 1-2% every month, for months on end, and your investors think you’re a hero for delivering a baby-smooth equity curve. This strategy worked like a charm until recently, when it fell apart completely. Eventually the black swan hits and your fund blows up over night… but who cares, you made a killing in fees and incentives between here and there. The aftermath is a huge ugly mess, and we’re working through it here and now.