High Correlations Among Asset Classes Means There’s No Place To Hide


When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.

Thirty eight of the forty five national stock markets in the MSCI All Country World Index fell last Wednesday, including supposedly uncorrelated real-estate stocks, high-yield bonds, crude oil and gold. When the picture in Europe seemed to brighten Thursday and Friday, most everything that had gone down in unison went up in unison.

“Correlation” refers to an assets tendency to move up and down in unison with broader markets. A correlation of 1.0 implies perfect unison. A correlation of 0.8 shows a high tendency to move in unison. A correlation of 0.2 implies that the asset tends to zig when the broader market zags.

“The facile answer is that in a crisis, correlations move to 1.0,” Howard Simons, a strategist at Bianco Research in Chicago, was quoted as saying.

Atlanta attorney J. Boyd Page of Atlanta-based Page Perry, said: “One of the major selling features of hedge funds and other alternative investments is their supposed lack of correlation with the stock market. But just when you need it most, that feature often vanishes and everything goes to hell in a hand basket. That important fact isn’t being explained to many potential investors.”

Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.