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
bandwagon-hopping.

“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.”

Related posts:

  1. Hedge Funds as the Next VCs
  2. Hedge Funds & the Technology Bubble
  3. The IMF, Donald Rumsfeld, and Hedge Funds
  4. Nassim Taleb, the Titanic, and Hedge Funds
  5. Nobel-Winning Hedge Funds

Comments

  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.