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The Journal of Wealth Management

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Article

The Effect of S&P 500 Correlation on Hedge Fund Alpha

Jerome B. Baesel, José F. González-Heres, Ping Chen and Steven S. Shin
The Journal of Wealth Management Spring 2012, 14 (4) 93-104; DOI: https://doi.org/10.3905/jwm.2012.14.4.093
Jerome B. Baesel
served as the founding chief investment officer of the Morgan Stanley Alternative Investment Partners (AIP) Fund of Hedge Funds group, St. Petersburg, FL. jbbaesel@gmail.com
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José F. González-Heres
is a managing director and portfolio manager for the Fund of Hedge Funds portfolios at Morgan Stanley AIP and a member of its Investment Committee, West Conshohocken, PA. jose.gonzalez-heres@morganstanley.com
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Ping Chen
is a research analyst for the Fund of Hedge Funds portfolios at Morgan Stanley AIP, West Conshohocken, PA. p.chen@morganstanley.com
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Steven S. Shin
is a research analyst for the Fund of Hedge Funds portfolios at Morgan Stanley AIP, West Conshohocken, PA. steven.shin@morganstanley.com
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Abstract

This article investigates the effect of S&P 500 Index correlation on the performance of hedge funds. Specifically, the authors separate the alpha and beta components of the four major hedge fund trading strategies in the Hedge Fund Research (HFR) database across three mutually exclusive equity–market correlation regimes. Using panel data regression, they isolate correlation regimes using dichotomous variables that add or detract from the alphas. They find that equity–oriented hedge fund strategies generate over twice the alpha during low–correlation regimes relative to normalcorrelation regimes. Their analysis provides a practical approach for optimizing allocations to hedge fund strategies that are expected to benefit from “stock–picking”skills during low equity-correlation environments. Furthermore, the proposed framework can be useful in identifying individual managers likely to benefit from this effect.

  • Copyright © 2012 Morgan Stanley. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Wealth Management: 14 (4)
The Journal of Wealth Management
Vol. 14, Issue 4
Spring 2012
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The Effect of S&P 500 Correlation on Hedge Fund Alpha
Jerome B. Baesel, José F. González-Heres, Ping Chen, Steven S. Shin
The Journal of Wealth Management Jan 2012, 14 (4) 93-104; DOI: 10.3905/jwm.2012.14.4.093

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The Effect of S&P 500 Correlation on Hedge Fund Alpha
Jerome B. Baesel, José F. González-Heres, Ping Chen, Steven S. Shin
The Journal of Wealth Management Jan 2012, 14 (4) 93-104; DOI: 10.3905/jwm.2012.14.4.093
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    • LITERATURE REVIEW
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Cited By...

  • Hedge Fund Strategies and Time-Varying Alphas and Betas
  • Hedge Fund Benchmarking: Equity Correlation * Regimes and Alpha
  • Scopus (2)
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  • Equity Dependence Structures amid Unconventional Monetary Initiatives
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