| Hedge Fund Observer: All funds are not equal |
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| 17/04/2006 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Hedge funds are much less decorrelated than it is often believed, wrote Florent Pochon and Jérôme Teïletche, both analysts at IXIS CIB, in a recent research note. The two authors say that hedge funds have become attractive thanks to their excellent performance over the last ten years, but certainly not for their hedging ability since they have proved to be much less decorrelated than expected over the years. "The point about the decorrelation of hedge funds is partly true, but it has tended to be mistaken with a zero correlation", say the economists. "With some dishonesty, some say that hedge funds are showing no beta whatsoever and only pure alpha, that is, no exposure to market risk." This is wrong: hedge funds are substantially correlated to broad-based indices such as the MSCI World and Govies World, according to their analysis. Historical correlation matrix (monthly data 1994 – 2006 – USD)
Return / Risk profile – Absolute performance – 1994 -2005
Source : IXIS CIB « Investing in hedge funds only because one hopes to get assets that are totally decorrelated is, we think, erroneous », they say. This does not mean that hedge funds should be thrown out the window. "The correlation is far from being homogeneous [depending on the strategy], which makes those funds attractive. Moreover, this correlation is likely to vary with market configuration. For instance, the increase in correlation with equities over the recent period is not a negative factor in a bull market." The diversity of hedge funds strategies, say Messrs Pochon and Teïletche, is a real opportunity for investors knowing how to take advantage of them since the strategies can be selected on the basis of its risk-return profile. The efficient frontier of the investor's portfolio can then be pushed farther to the left, which enhances the risk-return profile of the portfolio. J.L. |
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