“You heard it here first,” is becoming increasingly relevant here at HR.
That doesn’t necessarily mean we’re over here cooking up scoops and exclusives, but what it does mean is that when it comes to putting the pieces together and saying: “here goddammit, this is what all of this means,” we’re quickly becoming second to none.
On Thursday, in “‘What You Got Was The Exact Opposite’: Macro Hedge Funds Join The ‘Dumb’ Money,” we wrote that macro hedge funds, stinging from underperformance associated with a wrong-way bet on a continuation of the Trump-inspired long USD, short USTs trade, have essentially thrown in the towel and joined “Sharon“.
That is, “if you can’t beat ‘Sharon’, you might as well join ‘Sharon’” onboard the “all-in equity” bandwagon. Here’s what that looks like, courtesy of Nordea’s Martin Enlund:
As we also pointed out, macro hedge funds aren’t the only strategy that’s struggling to outperform a simple “buy SPY and forget it” approach YTD. Here’s a cross-strat snapshot:
Well as it turns out, saying “f*ck it, let’s just ride the S&P wave” trade has been going on for quite some time. And understandably so. It’s kind of hard to outperform a benchmark that’s staged a goddamn 8-year rally. Here’s Goldman:
Yesterday marked the 8th anniversary of the current bull market, making it the second-longest on record. On March 9, 2009, the S&P 500 index traded at 677 and it now stands at 2365, reflecting a price gain of 250% or 17% annualized (19% annualized with dividends). Happy Birthday indeed!
So given that, you’ll cut hedge funds a break when you find out that – at least according to what we can infer from return correlations – large swaths of the “2 and 20” crowd have relied almost exclusively on broad market exposure for performance over the past half decade. Consider the following from BofAML:
The one-year correlation between diversified HF performance and S&P 500 price return has declined from the three-year and five-year relationship, suggesting that HFs are less relying on market exposure. However, the correlation with S&P 500 varies substantially among different HF strategies. Short Bias is the only strategy that offers negative correlation or most diversification effects. Macro and Managed Futures also have lower correlation with the equity market. It is worth to point out that performance of the Merger Arbitrage strategy seems increasingly correlation to the S&P 500.
So while the one-year correlation may be down across the board compared to the three-year and five-year correlations, you can clearly see that the main driver of performance for most of these strats is simply the S&P’s price return.
Is that surprising? Well obviously not. But it is alarming. As BofAML notes, “Short Bias is the only strategy that offers negative correlation.”
Or, coming full circle, precisely what we said here on Thursday:
…which ironically means that the “strategy” employed to combat sh*tty returns will likely backfire spectacularly as the “smart” money has now joined the “dumb” money in the “all-in” equities camp.