Hedge Fund Reader : Equity based Hedge Funds face difficult times

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August 03, 2005

Equity based Hedge Funds face difficult times

The reducing volatility in stock market coupled with growing efficiency has led to less number of opportunities for equity based hedge funds. This was noted by U.S. investment bank Merrill Lynch. Merrill indicated that many equity based hedge funds use techniques which rely on the assumption that prices will return to their long-term averages. But what actually happens is that with a large influx of money and sheer drop in volatility makes it difficult for hedge funds to generate returns like before. The fall in volatility can be gauged from the fact that Chicago Board Options Exchange's Market Volatility Index has held below the 20 level mark for the past one year. This is a sharp contrast from the volatility spikes touching 40 several times and volatility generally hovering between 20 and 30 for six years prior to April 2004. The Chicago Board Options Exchange's Market Volatility Index is a benchmark measure of U.S. stock market volatility. When there is less volatility, hedge funds generally have less number of opportunities to make use of any mispricing. And Equity based hedge funds account for nearly 40 % of the total hedge fund industry which according to recent estimates is over $1 trillion. Today.reuters.com reports:

“The Chicago Board Options Exchange's Market Volatility Index -- also known as the fear gauge and a benchmark measure of U.S. stock market volatility -- has mostly held below the 20 level for most of the past 12 months.”

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August 3, 2005 in Research | Permalink