For hedge funds, volatility isn't enough

November 25, 2008 | By Jim Kim

The hedge fund industry's mantra has long been that they thrive on volatility. But recently, people have noted that there's been lots of volatility--record amounts in fact--but hedge funds are shaking out faster than coconuts in a hurricane. So is the time-honored mantra wrong? AllAboutAlpha.com notes a study by Steve Sapra of Analytic Investors that has found that volatility isn't enough. Hedge funds only thrive when market volatility is accompanied by low "cross sectional dispersion," which measures "the extent to which stocks move in different directions at a point in time." In 2000, you had both volatility and high dispersion, but in the current turmoil, you've got volatility but not much cross sectional dispersion, which explains a lot.

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