Hedge funds have been whining about how hard their job is, but they may have a point

You’ve probably heard that hedge funds are having a tough time of it.

There has been poor performance and insider trading investigations. Overall, the industry’s return was at 1.6% through June, according to Hedge Fund Research. That’s less than half the gains in the S&P 500.

A common complaint among hedge fund managers is that market conditions are such that is that much harder for them to eke out a return.

On one hand, you could say, well, that’s what you get paid 2% and 20% for. On the other hand, it turns out they may have a point.

Barclays just published a survey of investor firms with $7.7 trillion and $900 billion invested in hedge funds, and 57% of respondents said the reason hedge funds had underperformed of late is because of “macro conditions.”

What macro conditions, you ask? The chart below from Barclays shows how correlation and dispersion impact hedge fund returns. Correlation is the degree to which different stocks in the S&P 500 move in the same direction, and dispersion is the difference in stock movements regardless of whether or not they are moving in the same direction.

The chart on the left shows the amount of performance hedge funds were able to generate in different market conditions from 2000 to 2015. They generated 9.9% of alpha, or outperformance, when dispersion is high, and correlation is low, and very little when the reverse is true.

The chart on the right shows that, right now, we’re in the latter kind of environment. Correlation is high, and dispersion is low. In other words, it is hard for hedge funds to make money.

Maybe those whining hedge fund managers have a point.

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