Risk Factors Feeding Hedge Fund Performance


Earlier this week, I caught up with Jon Caplis, CEO of PivotalPath, a leading provider of hedge fund intelligence and analytics.  Caplis’ perspective is unique, not only because of his market savvy, but also because of the quality of his data; PivotalPath’s Composite Index includes 1,150 hedge funds, representing over $2 trillion in assets—and excludes funds with less than 18 months of track record or less than $50 million in assets.

In the hedge fund strategies chart below, we see simple dispersion of 12.2 percent between top-performing Equity Sector and bottom-performing Volatility Trading for the first six months of 2019, meaning strategy dispersion is running slightly above the long-term 2000-2019 mid-year average of 10.5 percent. And the top-performing Equity Sector super strategy has provided a 11.5 percent equal-weighted return YTD 6/30/19.

Source: PivotalPath

At initial glance, the dispersion data seems “normal”, however, drilling down in the top-performing Equity Sector subsets from the above chart provides one example of more color.  Many of the Equity Sector subsets are highly interest-rate sensitive.  In the chart below, we see simple dispersion of 6.6 percent between top-performing Financials and bottom-performing Energy/Utilities/Industrials for the first six months of 2019, or roughly half of the long-term 2000-2019 mid-year average of 11.8 percent.  And the top-performing Equity Sector Financials Strategy has provided a 12.9 percent equal-weighted return YTD 6/30/19.


Of further note, Caplis has been running correlations on a variety of risk factors since 1998.  He presently sees a significant spike in risk factor correlations above the historic highs of 2007/2008. Not surprisingly, average correlation among all hedge fund returns within PivotalPath’s Composite are also near multi-year highs as the current environment spawns “risk on/risk off” market action.  So not surprisingly with today’s high risk factor correlations, it is difficult to create unique return streams.

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