Stocks are soaring Why be cautious now?
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Lipper: Eight things to consider (but not necessarily accept) about markets
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The “beta” for long/short equity hedge funds has more than tripled vs the average beta since at least December 2018. Beta is the most common measure of stock or portfolio volatility relative to a broad equity index. Technically, beta is the percentage change in a stock (or fund) for every one percent change in the index. A stock/fund with a beta of 1 tends to move in percentage correlation with the index. A beta of 2 means a stock/fund moves 2% for a 1% move – up or down – in the index.
As this applies to long/short hedge funds, it means these funds in aggregate have substantially increased their long exposure to the riskiest stocks. For long/short funds, it also likely signals that the net long position is at its highest in a long time and/or the amount of margin/leverage applied is soaring. Hedge funds have been underperforming passive investment funds and the broad indices. My bet is this huge allocation to riskier stocks is a reckless effort to raise hedge fund perform