Correlations Climb in Wake of Crisis

Among the many legacies that remain from the financial crisis of 2008, one has perhaps received less attention than it is due: rising correlations.

Adam Zoll 04.11.2013
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Among the many legacies that remain from the financial crisis of 2008, one has perhaps received less attention than it is due: rising correlations. As many investors learned the hard way, even well-diversified portfolios can suffer painful losses during times of market chaos.

Large-cap stocks, small-cap stocks, and foreign stocks all got hammered. And even though the equity markets have more than recovered the inflicted losses, many investors still haven't gotten over the sting. As evidence, consider the rapid growth of alternative funds--currently the fastest-growing fund type with $34.6 billion added in just the past year. Using strategies similar to those of hedge funds, alternative funds appeal to investors who seek diversification at a time when correlations have increased among more traditional investment types. (Whether such funds deliver diversification is another matter.)

As evidence of this, let's look at the following correlation matrixes, compiled using the Morningstar Direct platform, which is aimed at institutional investors. The first matrix shows levels of correlation among various investment types in the five years since the financial crisis, and the second shows what the correlations were in the five years before the crisis. But before we dive in, we'll offer an explanation of how to read the matrixes and what they represent. (If you feel you already know this, feel free to skip the next section and go right to the matrixes.)

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

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Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com

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