Saturday, April 26, 2014

Hedge Fund Irrelevance

It's better to burn out
Than to fade away
--Neil Young

A decade ago, contributors at Minyanville regularly observed the self-destructive nature of hedge funds. My friend Todd Harrison was fond of saying that it was like 9,000 fund managers in a circle shooting each other.

Fast forward to today. The war of attrition has driven many shops from the market. Hedge fund superstars have been displaced by high frequency trading black boxes.

With the onset of algorithmic alchemy, hedge fund unique impact on the tape is dwindling. For example, data suggest that the performance of equity hedge funds and the S&P 500 (SPX) is increasingly correlated.

Ironically, the original purpose behind hedge funds was to reduce correlation to general markets. The greater degrees of freedom taken by hedge funds (e.g., taking short as well as long positions, investing in alternative asset classes deemed not to move in sync with popular investments, etc.) provided a vehicle for hedging portfolio risk.

It appears, however, that hedge funds are increasingly choosing to follow trends rather than to fade them.

As they do so, hedgies render themselves less relevant.

position in SPX

1 comment:

dgeorge12358 said...

The Texas Hedge
Long Stock, Long Calls