Thought Exchange

Tagged: Correlation RSS

• Pete 12:19 PM on September 7, 2010 Permalink
  Tags: Correlation, Sentiment ( 84 )   

  Burry, Predictor of Mortgage Collapse, Bets on Farmland, Gold 

  Bloomberg.com reporting:

  Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said he is investing in farmable land, small technology companies and gold as he hunts original ideas and braces for a weaker dollar.

  “I believe that agriculture land — productive agricultural land with water on site — will be very valuable in the future,” Burry, 39, said in a Bloomberg Television interview scheduled for broadcast this morning in New York. “I’ve put a good amount of money into that.”

  Burry, as head of Scion Capital LLC, prodded Wall Street banks in early 2005 to create credit-default swaps to bet against bonds backed by the riskiest home loans. The strategy paid off as borrowers defaulted, letting his investors more than quintuple their money from 2000 to 2008, according to Michael Lewis’s book “The Big Short” (Norton/Allen Lane).

  Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together.

  “I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing — we’ve been experiencing for a number of years — is problematic.”

  Crowded trades + highly correlated asset classes = Quick roller coaster rides for investors

   

• Pete 2:29 PM on August 11, 2010 Permalink
  Tags: Correlation, SPY ( 28 )   

  Rising correlation and computer-driven trading 

  Reuters article from July 2010:

  The similar trading strategies employed by many HFT programmes (such as statistical arbitrage) heighten correlation, ensure trades become crowded, and create a self-destructive liquidation when they go wrong.

  Critics focus on unusual market volatility experienced in August 2007 and again during the “flash crash” of May 2010 to show why HFT has increased rather than reduced volatility. The essential similarity among many quant strategies results in trades becoming crowded, and the application of HFT techniques ensures that when they go wrong it results in a disorderly rush for the exits.

  The August 2007 and May 2010 episodes were the only ones involving high-frequency computer-driven trading. But the same basic problem (automated quant-based strategies and crowded trades causing liquidity to disappear in a crisis) can be traced back to previous market crises in 1998 (the failure of Long-Term Capital Management) and October 1987 (portfolio insurance and the stock market plunge), according to critics.

  I remember reading this article in July. Earlier I posted that the S&P correlation index is at record levels.
  If everyone is playing the same game and they are jumping into and jumping out of the markets at the same time it explains the big quick moves.

   

• Pete 1:56 PM on August 11, 2010 Permalink
  Tags: Correlation, SPY ( 28 )   

  S&P 500 correlation index rises to record level 

  Marketwatch.com reporting:

  The CBOE S&P 500 Implied Correlation Index based on options expiring in January 2011 rose to a record high of 79.84 at one point Wednesday, according to the Chicago Board Options Exchange. The index rises when S&P 500 (SPX) stocks move more in tandem, or have a higher correlation. In July, The Wall Street Journal reported stocks were trading in lock-step more than at any time since the crash in 1987, showing the recent tendency of investors to move in a herd and raising red flags with analysts.

  I bolded the last line for sentiment purposes.