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In the Market - November 2009
Nov 15, 2009
A strong finish?
2009 is shaping up to be one of the best years ever for the financial markets. The US equity markets are up over 20% on the year, and even more from the March low. Hedge funds are having a banner year as well, a lot of funds are producing record returns this year. It will be interesting to note how hedge funds react in the last month of the year. Do they take chips off the table and enjoy the record returns or will they double down with the house’s money?
Looking at the HFR equity hedge index vs. the S&P 500 we can make some conclusions with how hedge funds have reacted in the past. Since 2003, equity hedge fund volatility has been higher in December than the rest of the year only once. For the S&P 500, this has happened twice. The ratio of volatility between hedge funds and the S&P 500 also decreases by over 20% in December. These two facts together show that hedge funds seem to be taking less risk in December than they do throughout the rest of the year. Coincidentally, hedge funds performance vs. the S&P for the month is also lower. Over this time, the S&P 500 has outperformed the hedge fund index in December, while the hedge fund index significantly outperforms the equity benchmark the other 11 months of the year.
December has been a great month for the equity markets the previous 6 years with the S&P gaining over 1.5% on average. Hedge funds have returned slightly less than that with about a third of the risk. The other months of the year, hedge funds return more than double than their equity benchmark while having roughly half the risk. If things play out like they have and we have a Santa rally, hedge fund investors might be left with a little bit of coal.