The Correlation Creep: Hedge Fund Alpha Rises, But So Does Beta [Interview With Marlin Naidoo BNP Paribas’ Head of Capital Intros]

In 2025, hedge funds returned an average of 10.53%, with annualized returns of 7.96% over the last five years. According to a recent report from BNP Paribas, alpha generation continues on a year-over-year basis, with hedge funds delivering 2.13% of alpha versus the MSCI World Index in 2025 and 3.02% on a five-year annualized basis.

The report also states that correlation compared to the MSCI World has risen in recent years, climbing to 0.92 over the last year, 0.8 over the last three, and 0.76 over the last five. Beta is also up, rising 0.24% over the last 12 months, compared to 0.15 over the last five years.

Meanwhile, hedge funds continue to display low volatility. In 2025, volatility among hedge funds was four times lower at 2.43% compared to the MSCI World’s 9.25%. Over the last five years, volatility has been five times lower at 2.75% versus 14.39%.

According to BNP Paribas, tactical trading strategies like quant equity, quant multi-strategy and discretionary macro generated returns while holding correlation, beta and volatility low. In an interview with Hedge Fund Alpha, BNP Paribas’ Head of Capital Introduction,  Marlin Naidoo shared extra details on the report.

Correlations on the rise

With correlations to equity markets reaching such high levels, some allocators have been worried that hedge funds may be losing their primary value as a diversifier. As a result, they’ve been adjusting their sub-strategy mixes to counter that.

According to Naidoo, when allocators look at hedge funds, they’re not just looking at the return, but also the alpha, the beta, the correlation, the volatility and other key metrics. He emphasized the importance of looking at everything together instead of in isolation.

“As we narrow the lookback from five years to three and then one year, correlation increased across the board,” Naidoo said. “Historically, equity long/ short and event‑driven strategies have consistently shown higher correlation with equity markets than other approaches. It is worth highlighting that beta remains moderate, volatility is low and alpha is steady.”

Multi-strategy and credit see meaningfully low correlation

What really grabbed his attention was the increased correlation to equity markets for multi-strategy and credit. Although this correlation was ticking up, Naidoo said it remained still meaningfully low over the three- and five-year period. When looking at all the data, a key question was why the correlation is rising.

Looking at it over a one-year period, Naidoo said 10 of the 12 months were positive, so a high correlation would’ve been a good thing because otherwise, they wouldn’t have been making money.

“We must distinguish between coincidental correlation and a fundamental shift. If our diversifiers move in lockstep during a market sell-off, they aren’t diversifying – they are just adding to the slide. That’s the risk we’re highlighting,” he added.

Into the nitty gritty

As a result, investors are looking at their underlying investments and then questioning whether a particular fund or strategy will have a drawdown in the event of a plunge in the equity markets, or whether that correlation is merely coincidental.