Alpha Exchange Is There a Plumbing Problem in Equity Correlation?
Feb 10, 2025
Recent fluctuations in stocks have sparked a discussion on the current state of equity correlation. The podcast explores whether the market's low correlation phase can last, and the risks of recency bias influencing investor behavior. Unique investment assets like gold and Bitcoin are highlighted for their potential to provide stability and growth amidst economic uncertainties. The significance of diversifying assets and using market-based insurance strategies is emphasized as a proactive approach to navigating potential future market volatility.
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Plumbing Problem in Equity Correlation?
- Dean Kurnutt observes low implied correlation in the S&P 500 at 11.
- He questions if a "plumbing problem" exists in equity correlation.
Recency Bias in Correlation
- Kurnutt warns against recency bias, where recent low correlations might create false expectations.
- He reminds us that stocks can become highly correlated.
Diversification as a Tradable Risk
- Diversification has evolved from a passive exercise to a tradable risk exposure through derivatives.
- Multistrat hedge funds actively trade this risk, impacting market dynamics.