Comments on: Correlation chart of the day, hedge-fund edition

By: parkparadigm

parkparadigm — Fri, 25 Nov 2011 11:30:10 +0000

I’m biased but one of the best (only) ways left to get true alpha is to invest in startups/private growth companies… (of course that doesn’t mean it is risk free, just that returns will have a very low correlation to public markets…)

By: Mike.Abrahams

Mike.Abrahams — Tue, 22 Nov 2011 03:52:49 +0000

Note the spike in correlation in late 2008. This simply shows that the recent high levels are somewhat due to most firms taking losses during the financial crisis: the S&P and their own portfolios were both subject to large downward movements, thus raising the correlation. I wonder what this would look like on an (e.g.) two year horizon.

By: Beezer

Beezer — Mon, 21 Nov 2011 17:21:55 +0000

The equity markets are casinos, not places of investment. That they are a zero sum game would result in the correlation you cite. Minus, of course, the vig extracted by the house managers.

By: TFF

TFF — Mon, 21 Nov 2011 16:58:10 +0000

Trading is essentially zero-sum. There is a certain profit associated with any given market inefficiency, which necessarily must be divided up amongst all the people attempting to exploit that inefficiency.

Lim P/M as M->inf = 0.

By: ErnieD

ErnieD — Mon, 21 Nov 2011 16:21:17 +0000

Does this mean that the smart money is getting dumber?

And the dumb money socking money away in low-cost Target Date funds in 401ks is getting smarter?

By: Th.M

Th.M — Mon, 21 Nov 2011 15:55:57 +0000

For further reading, Kenneth French had a good summary on the costs on active investing:

http://qed.econ.queensu.ca/faculty/milne /322/ECON322(2008)%20Kenneth%20R%20Fren ch.pdf

(I’m not sure what you think the correlation should be, actually; I’m more surprised by the low values at the beginning of the sample than the 0.9 in the end.)

By: callesantiago

callesantiago — Mon, 21 Nov 2011 15:30:10 +0000

Why is anyone surprised at this correlation? Most stock-market trading volume today *is* hedge-fund trading volume.

HFT shops alone account for around 70% of volume ( e.g., see http://www.zerohedge.com/article/what-pe rcentage-us-equity-trades-are-high-frequ ency-trades ). Add in all the other equity hedge funds, and the figure is even higher.

In contrast, index funds and ETFs trade almost exclusively to rebalance or accomodate inflows/outflows, and traditional mutual funds are typically very-low-frequency traders.

To a close approximation, hedge funds *are* the market.