Falling Correlations Boost Hedge Fund Returns

November 03, 2017

When looking at hedge fund performance in 2017, equity hedge has been by far the best performing strategy, with the HFRI Equity Hedge Index up 9.6% through the end of the third quarter.

What has made the environment so appealing for equity hedge performance in 2017? This week’s chart looks at the CBOE S&P 500 Implied Correlation Index over the past year. The index measures the expected average correlation of price returns between S&P 500 Index components, implied through SPX option prices and prices of single-stock options on the 50 largest components of the SPX. The index hit a low of 13 during the month of October, as correlations continued to trend lower.

An environment in which correlations are lower is a positive for active managers, particularly those that are both long and short individual stocks. When correlations fall, we expect stocks to trade more off fundamentals versus moving with the general market. We believe this is one factor that has helped equity hedge strategies during 2017, and should continue to be accretive to returns if correlations remain depressed.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.