Hedge Funds & Bolsa

Artigo que compara o desempenho dos hedge funds e o desempenho das Bolsas de Valores.

As go equity markets, so go hedge funds?; Suspiciously strong link examined

(From The International Herald Tribune, provided by LexisNexis)
June 12, 2007 Tuesday

We are early in the game in the growth of assets invested in alternative strategies, says Todd Builione, a managing partner at Highbridge Capital Management, a $34 billion hedge fund that is majority owned by JPMorgan Chase.

Indeed. According to Douglas Wurth, global head of alternative investments at JPMorgan Private Bank, $1 billion a month is flowing into hedge funds on JPMorgan's platform, where wealth managers are now recommending that very rich individuals ($25 million or more) and institutions put 35 percent of their portfolios in alternatives, and 20 percent of that into hedge funds.

Wurth and Builione were both speaking on a panel with other senior executives from the private bank at a briefing in New York. It was clear that alternatives continue to be the rage for a number of reasons, including the low correlations that hedge funds have historically had with major equity and bond markets.

In other words, when those markets tank, hedge funds, in general, do not.

Then there's Ray Dalio.

Dalio, the founder of Bridgewater Associates, a hedge fund with about $30 billion under assets, has some different thoughts on his industry, including some tough questions on why hedge fund returns look so much like stock market returns when they are not supposed to be correlated.

In a private research letter sent out this month, he and a colleague examined the correlation of hedge fund returns to the returns of certain market indexes.

In general, hedge fund returns should not replicate stock market returns. If they did, investors would be smarter to buy index funds and not pay the steep fees of hedge funds.

Because hedge funds can hedge their bets, borrow to increase their bets, tread where others fear to tread and seek out nontraditional assets, they should generate excess returns (alpha), not just reflect market returns (beta).

According to Dalio's analysis, over the last 24 months hedge funds were 60 percent correlated to the Standard & Poor's 500 stock index, 67 percent correlated to the Morgan Stanley Capital International EAFE (for Europe, Australia and the Far East) index of foreign shares, and 87 percent correlated to emerging market equities (unhedged).

They were 41 percent correlated to the Goldman Sachs Commodity Index, 52 percent correlated to high-yield, or junk, bonds, and 42 percent correlated to mortgage-backed securities.

The letter also parsed the correlations by strategy, which is a more precise way to think about hedge funds, since different types of funds take different kinds of risks.

Short-biased hedge funds have a negative 70 percent correlation to the S&P index, while equity long-short, the description applied to what most people think of as a hedge fund strategy (betting that some stocks might go up and others might fall, usually with leverage) had a huge correlation of 84 percent.

Then Dalio looked at data back to 1994, which showed that historical correlations were in the range of 49 to 54 percent - high, but not as high.

So as equity markets have done well, hedge funds have done well - not necessarily because of their genius but because they have the wind of the stock markets at their back and because a lot of them use leverage to magnify their bets. (Dalio did not return calls for comment.)

In a period when volatility is low and credit spreads are tight, it should be difficult for hedge funds to make a lot of money. But many funds appear to be taking the easy way out.

Still, no one cares about correlations, or anything else really, until the markets head down. But a lot of investors like Bridgewater as a part of a diversified group of hedge funds because Dalio has a contrarian view, and if and when the markets tank, he should - and he had better - trounce his more correlated peers.