A systematic way to assess overall risk is to track the rolling 20 day volatility of the HFRXGL index. The chart below makes it clear that index volatility has returned to the July lows, and is currently at the lowest level in the past six months.
However, without something to compare it to, we can’t say from this that hedge funds have reduced their market exposures. To do that, we compare the same volatility measure applied to the seven future contracts often used in replication products. The chart to the left shows the rolling 20 day volatility of each of the key replication factors: S&P 500, Russell 2000, Eurostoxx, Emerging Markets, 2 Year Treasurys, 10 Year Treasurys, and a USD index. With the exception of the 2 Year Treasury, realized volatility has been rising in every market through October.
Indeed, the ratio of the volatilities is now half what it was in July. Here is the ratio of the HFRXGL volatility to the average of the market volatilities, showing how much this measure of hedge fund risk has dropped in the past few months. From this, we conclude that hedge funds, as represented by the HFRXGL Index, have taken risk down since August.