Hedge Fund Correlation Research Report by Credit Suisse

Hedge funds generally are more correlated in bull market runs and more de-correlation at market downturns. A comparison of the Credit Suisse/Tremont Broad Benchmark Index (HEDG), an asset-weighted broad benchmark of the hedge fund industry, to the MSCI World Index, a broad equity index, shows that the 12-month rolling correlation between the two has dropped from its peak of 0.97 in June 2006 to 0.61 in June 2008. The findings are given in a research report by Credit Suisse Index.

The report showed that during times of market stress sharp declines from HEDG’s previous peak levels of positive correlation with MSCI World demonstrated the ability to de-correlate from broad equity market indices.

Between July 2007 and June 2008, HEDG increased by 4.09% compared with a fall of 12.5% in the MSCI World Index and a decrease of 13% in the S&P 500.

The ability of hedge funds to maintain exposure to a range of asset classes allows them to preserve capital in down markets and, if successful, offer a more balanced investment option compared to traditional equity indices. In addition, the ability of hedge funds to monetise negative views through short selling is clearly effective during market downturns.