The latest hedge fund shocker from Morgan Stanley: the correlation between hedge fund returns and the S&P 500 has been rising steadily to almost 1 in the last couple of years. [via Felix Salmon]
Here’s Morgan Stanley’s chart from WSJ, plotting the correlation between the HFRI Equity Hedge Index and the S&P 500 Index over the last 15 years.
We all know this hasn’t been the best year for hedge funds, and this chart certainly doesn’t help boost confidence in the industry. Hedge funds draw a lot of their appeal from generating alpha—returns above what is originally predicted from the market and other factors—and outperforming the stock market. But that is no longer the case as the difference between hedge fund returns and market returns narrow.
This chart shows that aggregate alpha among hedge funds on the HFRI Equity Hedge Index has gone in the negative territory [from WSJ]—they’re losing money.
From WSJ’s Mark Gongloff:
For another thing, whatever gap there is between hedge fund returns and market returns may not be positive — the annualized excess hedge-fund return for the past five years has turned negative this year, meaning you were actually better off just sitting in the market than putting money in a hedge fund.
Gongloff is basically saying that investors might have been better off putting their money in an index fund, which invests to mirror certain market indexes and has much lower management costs than a hedge fund.
Now, the HFRI Equity Hedge Index, as implied by its name, is an index of hedge funds that invests mainly in stocks, so it doesn’t include all hedge funds. But this still doesn’t bode well for the hedge fund community.