Hedge fund correlations rising

The beta for hedge funds is rising similar to what happened prior to the financial crisis. The FT reports on research from a number of sources that show hedge fund indices such as the HFRI composite at correlations anywhere from above .8 to over .9 using a three-year rolling averages. By any measure, this is high. 

This is what happens when there is a long slow increase in equity returns and hedge funds have lagged with performance. They will get long. They have to if they want to keep up with equity benchmarks. It is hard to say you are a "smart" manager who earns a fat fee if you underperform the S&P 500 by double digits. Now investors should not buy hedge funds and benchmark them against a volatile index, but that is the way of the world. Hedge funds are not really hedge funds. They are supposed to be high beta funds in up markets and low beta funds in down markets.

The success of hedge fund managers in the next year will be if whether they can dynamically adjust their beta down when the market starts to crack. The ability of managers to adjust beta will be the true driver of skill in this market.