Here’s chart from Richard Bernstein’s latest white paper titled An Alternative To Alternatives. Among other things, Bernstein aims to debunk the myth that hedge funds as an asset class offer diversification benefits.
Quite the contrary. Hedge funds have actually been tightly correlated with stocks since 2006.
The notion that increasing correlation was a result of 2008’s bear market is not accurate. Investors may have felt that 2008’s bear market was extreme because asset correlations were already high before the bear market began. Unless one held sizeable positions in treasuries during 2008, there was mathematically no place to hide.
Chart 2 shows the correlation between the S&P 500 and hedge funds. The effect that the technology bubble had on correlations is apparent. Correlations began to rise during the late-1990s perhaps because hedge funds were long technology, media, and telecom. However, the correlation between hedge funds and the S&P 500 moves toward zero as they short technology and go long virtually anything else.
Photo: Richard Bernstein Advisors