There is a correlation between the risk associated with hedge funds, and the return. If we
are given two variables that are perfectly correlated, or maybe 99% correlated, the
variables must be 100% timed. If variable A is perfectly correlated with variable B at a
given point in time, then we can say A is the correlation of B. However, this pairâs
correlation may change in time, or fluctuate on a daily/annually basis.
The correlation of Risk and reward in hedge funds are not two separate variables;
however they act as if they are in some cases. Iâll provide an example.
Variable A is correlated with Variable B at point 1.1 in time and is correlated at 95% at
1.2 in time. Variable A has fundamental reasons for its change that are different than the
fundamental reasons Variable B has for its changes, therefore, a change in correlation.
This can be the same for the risk and reward of hedge funds. The risk will always be
correlated differently at different points in time. Ergo, with change in risk will result in
change in reward. This does not mean that with greater risk comes greater reward, and
vice versa, this simply means that they are symmetrical, and move together.
Hedge funds have proven to adapt, create new ideas, create demand, and in some cases
create market movement.
This was in his article, but for some reason I cannot find the whole article, so forgive me for my sourcing abilities.