Correlations between stocks and many hedge fund strategies — ranging from multi-strategy to credit — are at or near historic highs, raising the question of why equity risk keeps showing up in all the wrong places.
While it’s intuitive to tally up the direct stock exposure in a portfolio, correlation is a signal of the equity sensitivity in funds that might only invest a small amount in stocks – or nothing at all.
“It tells you that sometimes it’s just that much harder to get rid of equity risk,” says Jon Caplis, CEO of PivotalPath. In a sudden market correction, allocators could be more exposed than they expect, depending on their exact mix of hedge funds. Investors have been tested a few times this year. In April, when the Trump administration announced exceptionally high tariffs, stocks dropped on fears of hits to corporate earnings and bonds declined on fears of a weak dollar.
“When the markets are in risk-off mode, the equity market is just that main overarching risk,” the PivotalPath founder says. “And it’s hard to avoid.”