The breaking down of the dollar-risk asset correlation is a trend stock market investors should begin topay attention to, Nordvig suggests.
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The yellow metal is acting more and more like a safe haven, moving away from its risk asset correlation that characterized its trading toward the end of 2011.
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They expected their low correlation asset classes to provide protection.
Hug really just recognized very young into the inception of MLPs the favorable characteristics of the asset class: High current income, growing distributions, tax-advantaged income, and low correlation to broader asset classes.
Investment results in 2008 showed clearly that correlation of asset classes varied unpredictably and with no warning.
Mr Haldane finds that both volatility and correlation between asset classes have increased in tandem with volume.
The bad news is that, as the financial markets recovered, the positive correlation across asset categories has continued.
The bottom line: The resumption of easy money policy by the Federal Reserve in the aftermath of the 2008 financial crisis has re-affirmed and broadened the positive correlation of different asset categories, undermining the effectiveness of asset diversification strategy in reducing market risk.
Paul Lavin of WestLB Mellon Asset Management has found a close correlation between the performance of hedge funds investing in shares and the breadth of the stockmarket.
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The beauty with these is they do have a tremendous amount of liquidity associated with them, which is different from a lot of other asset classes that do have low correlation to the broad equity market.
Part of this analysis requires a correlation study to test if the asset class has unique risk.
The only asset class they could find with a positive correlation was gold but the long-term real return of gold has been just 1% a year, barely better than cash.
Hyper-correlation seems to have faded across all asset classes and market sectors.
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Most people who say this have no real knowledge of correlation or know to use it to select asset classes.
We use historical correlation measurements to help define what qualifies as an asset class and what is simply a sector or subsector.
Each marker on the correlation lines in Figure 1 signifies a 10 percent change in asset allocation from Asset Class A to Asset Class B.
These folks may decide to include asset classes that have no real long-term return with the hope that low correlation with other investment will generate enough excess return from rebalancing to make up for the shortfall.
If an asset class has unique risk, it will exhibit variability in a rolling 3-year correlation analysis similar to Figure 2.
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