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Hedge Fund Returns Exhibit Commonalities In 2019

Today we want to take a brief look at the performance of a few different hedge fund strategies in 2019; there is more to the industry than equity long short, or CTAs, and the differences show up in many places, not just returns. To keep the charts readable, we focus on 5 of the largest strategy indices published by BarclayHedge:

Barclay Emerging Markets Index

Barclay Equity Long Bias Index

Barclay Equity Long/Short Index

Barclay Fixed Income Arbitrage Index

Barclay Multi-Strategy Index

as well as the flagship Barclay Hedge Fund Index and CTA Index.

When we plot the returns vs risk scatter plot for performance in 2019 (through July), at first glance, the resulting chart is not particularly visually exciting. But at a closer look, one curious thing stands out - almost perfect linear alignment of the dots.

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Usually, such an alignment indicates considerable similarity across strategies in terms of risk-adjusted performance, with not much diversification, as you basically move along the diagonal line when “dialing” for particular risk or return level (such as when using leverage). This similarity can be confirmed with a couple other observations: relatively similar Sharpe ratios (pretty close to 2.0 in the table below, with a couple of exceptions), 

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and relatively high correlations between the indices (in the table following the stats, averaging in the high 70s, again with a couple of exceptions).

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Such similarities suggest considerable commonality in the performance drivers in 2019, or, put more eloquently, “a rising tide lifts all boats”. Despite such general similarities, some strategies traditionally stand out - notice the very low levels of correlation of the CTA index to the other indices, as well as its pretty high Sharpe Ratio (bested only by the Fixed Income index). These two factors combined are a very strong sign of recent (and much needed) CTA come back.

It will be interesting to see how these relationships evolve further in the remainder of 2019.

Dmitri Alexeev is Co-Founder of AlphaBot