Hedge Funds Correlated To But Lagging S&P 500

Oct 15 2012 | 12:54pm ET

Hedge fund performance remains highly coordinated to the S&P 500 while continuing to underperform it, says Bank of America Merrill Lynch analyst Mary Ann Bartels.

Hedge funds' one-year correlation with the S&P 500 reached a record high of 98% in September 2011 and although that had fallen to 82% as of the end of September 2012, it's still high compared to the historical average of 30%.

“However,” said Bartels, in the latest BofAML Hedge Fud Monitor, “the drop in correlation comes with a staggering underperformance relative to the S&P 500. The question remains: arethere too many hedge funds chasing too few returns?”

Hedge funds were up 0.51% in September, according to the BofAML, as the S&P 500 rose 2.42% for the month. Long/short equity funds turned in the best performance in September, adding 0.96%, followed by event driven funds, which were up 0.85%. Short bias funds were the worst performers, shedding 1.34%.

Bartels said their models indicate market neutral funds bought market exposure to 4% net long from 1% net short. Equity long/short fund increased their market exposure to 22% from 19% net long. Macros sold the S&P 500, sold commodities and emerging market exposures, bought the NASDAQ 100, EAFE exposures and 10-year Treasuries while partially covering their US dollar shorts.

A look at Commodity Futures Trading Commission data showed large equities speculators bought the S&P 500, but sold Russell 2000 and NASDAQ 100 futures.

Agriculture specs sold soybeans, corn and wheat while metals specs bought gold, silver copper and platinum and flat palladium.

Energy speculators bought heating oil while remaining essentially flat crude, natural gas and gasoline. Forex speculators sold the yen while adding to their shorts in euros and dollars and interest rate speculators covered 30-year Treasuries while selling 10- and 2-year.


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