09/09/2011 12:47 pm ET Updated Dec 06, 2017

Hedge Funds Have Worst Month Since October 2008 As Correlations Hit Record High

By Amy Or of the Wall Street Journal

One complaint among hedge fund managers during the financial crisis was asset correlation: Whatever they did, they couldn’t escape from market exposure. The situation has worsened yet again after a brief period of normality earlier this year, punishing hedge-fund performance.

Correlation between assets spiked to a new high of almost 80% in August, surpassing levels seen during the crisis, says Hennessee Group.

Hedge-fund managers “responded by taking down exposure levels and increasing their cash balance,” Hennessee said in a press release. “Managers also shifted to higher quality, large-cap names and traded out of more economically sensitive names for more recession-resistant ones.” They were then punished when the market roared back at the end of the month.

The Hennessee Hedge Fund Index declined-3.36% in August and is down 1.80% year to date, while the S&P 500 declined -5.68% in August and is down 3.08% year to date.

“August was a very challenging month for hedge funds as they were once again ‘whipsawed’. Hedge funds were forced to reduce exposure in order to limit losses as the financial markets plummeted. They then underperformed as the markets rallied back strongly into month end,” Hennessee cofounder Charles Gradante said in a release.

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