Hedging on Hedge Funds (postscript on correlations, beta, and “alpha”)

Hedging on Hedge Funds (postscript on correlations, beta, and “alpha”) by Cliff Asness 

After my last piece on hedge funds I’ve gotten a lot of questions that often come down to the issue of “beta” versus “correlation” with the market and, more generally, about “alpha.”  I thought I’d share a version of my typical response.

First, in response to many otherwise good questions that I think confuse correlation with beta, they are not the same. As an example — for a fund that is 10% long stocks and 90% cash, the beta of the fund is 0.1, but the correlation to stocks is 1.0 as stocks drive all the variability (in excess returns). Similarly, a fund that is 40%...