But the theory didn’t stand up terribly well to the blow-ups of this past summer.
Invesdex is a Bermuda-based alternative investments firm that specializes in providing access to alternative styles through OTC return swaps.
Eye-catching correlation
Invesdex tracked the various hedge fund indices and styles against the leading market indicators through the recent market disruption. Although investors have got used to the idea that all assets are correlated in periods of crisis – they all sink – the degree of correlation found by Invesdex is eye-catchingly high.
Invesdex notes that, in the run-up to the market seizure, during the five-week period from July 13 to August 16, the S&P 500 went down by 9% and that most alternative indexes suffered similar or worse fates. The HFR hedge fund index and the Calyon Barclay CTA Index experienced commensurate negative returns (also 9%), and the S&P Managed Futures Index posted a shocking 20% drawdown.
| Sources of non-correlation |
| April 1994 to July 2007 |
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| Source: Invesdex |
"Correlation is a frequent topic of discussion with our clients," says Valere Costello, Invesdex’s co-founder and chief executive.
