With Correlation So High Why Are Hedge Funds Underperforming The S&P 500 By So Much?

A recent Goldman Sachs Hedge Fund Trend Monitor led its report by addressing a perplexing question in the hedge fund community. The report noted that in 2014 hedge fund performance by their measure was a paltry 1 percent at a time when the S&P 500 average was up 13.7 percent.

Even given the slightly higher performance of the BarclayHedge Hedge Fund Index, which was up just 2.89 percent in 2014, hedge funds dramatically underperformed stocks last year when compared to the S&P 500, the Goldman report noted. The oddity is that hedge funds in general are correlated to stocks by a magnitude of nearly 0.80 depending on the indexes being compared. They exhibited high correlations during the 2008 market crash,...