RT Journal Article
SR Electronic
T1 The Effect of S&P 500 Correlation on Hedge Fund Alpha
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 93
OP 104
DO 10.3905/jwm.2012.14.4.093
VO 14
IS 4
A1 Jerome B. Baesel
A1 José F. González-Heres
A1 Ping Chen
A1 Steven S. Shin
YR 2012
UL https://pm-research.com/content/14/4/93.abstract
AB 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.TOPICS: Real assets/alternative investments/private equity, statistical methods, performance measurement, manager selection