Clive Corcoran's  Instablog

Clive Corcoran
Send Message
Clive Corcoran is an FSA registered investment adviser providing private client wealth management services, as well as being an author, financial educator/mentor and an independent trader. As an author he has written Long/Short Market Dynamics: Trading Strategies for Today’s Markets (Wiley,... More
My company:
Technical Analysis Training
My blog:
My book:
Long/Short Market Dynamics
  • Asset class correlations and inverse ETF's 0 comments
    Apr 9, 2009 6:20 AM

    It is easy to get confused about statistical correlation and the behavior of inverse funds as is found in this article recently published at SeekingAlpha. The author applauds the availability of inverse ETF's and proposes that these will enable retail investors to reduce risk through a process of diversification

    One of the simplest ways to do this is through the use of non-correlated investments that zig when everything else zags. In the old days, that meant having exotic futures accounts or taking positions opposite to the markets entirely, using margin accounts to sell individual stocks short - one stock at a time.

    Inverse funds, as their name implies, go up in value when the markets go down. There are plenty of choices to consider, with everything from the S&P 500 to specific sectors available in the mix.

    Unfortunately the author seems to blow his argument apart about the usefulness of inverse funds as part of a strategy to seek out uncorrelated asset classes in a diversified portfolio when he also says later on: 

    Of course, if the markets go up, the reverse is true and these things can lose money in a real hurry, so one can’t just pile in indiscriminately.

    If you are long an inverse index fund and the market goes up your returns will be highly correlated with the index fund - it's called negative correlation.

    The take-away is that it's harder to immunize a portfolio from system risk than it may appear. Correlation based strategies are also hazardous for many other reasons which I have discussed in Long/Short Market Dynamics.

    The most insidious reason is that during periods of liquidity crises the co-variance of asset classes rises dramatically towards unity i.e. they all go down together.

Back To Clive Corcoran's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers


  • Daily Form analysis looks at $EURUSD, $AUDJPY,EWP, EWQ, PCY,FNF and $GLD - #forex #euro #eumess #aussie
    Nov 30, 2010
  • What happened to not too hot/not too cold signs of a tepid recovery that made bad news good news for markets?
    Nov 16, 2010
  • One should never underestimate damage to $AUDJPY when there is any negative news re China - #forex #aussie
    Nov 12, 2010
More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.