G3 Recap 3-30-11

Main Items:

  • US ADP rose 201k in March vs 208k expected and 217k previously. Median expectations for NFP is 190k vs 192k previously.
  • SEC voted unanimously to advance a proposed rule that would require banks to retain at least 5% of the credit risk on securities backed by mortgages on all but the safest loans. – Dealbook


  • Euro-zone data:
  • March Economic Confidence at 107.3 vs 107.5 expected and 107.8 previously
  • March Industrial Confidence at 6.6 vs 6.0 expected and 6.5 previously,
  • March Service Confidence at 10.8 vs 11.5 expected and 11.1 previously

Swiss KOF LEI printed 2.24 in March vs 2.18 expected


  • Partially as a result of High Frequency trading, we’ve seen a sharp increase in realized correlation across single stocks over the past few years. Less publicized is the higher correlation between asset classes. Prior to 2008, commodities were touted as a great portfolio diversifier because of their low correlation to stocks. That has been true if one uses daily data over rolling yearly time periods. Since 2008, however, the correlation between the S&P and GSCI has skyrocketed, and has remained elevated.

    Whether this observation should lead to a portfolio adjustment depends on one’s view of the reason for this as well as its expected persistence. It is pretty easy to point fingers at the Fed’s QE program as a cause for this, as well as the secular shift of global growth from developed economies to commodities intensive EM economies. The sudden jump in correlation, however, suggests that the cause is non-secular in nature.

  • The increase in realized single stock correlation over the past few years has not, as many have expected, had a big negative impact on Long-Short Hedge Fund returns. The main reason for this appears to be that L/S HF’s as a whole are not really picking stocks – at least not since 2003 or so. The below chart shows the rolling 12m returns of the HFRI Equity Hedge index vs a 60% position in the MSCI World. Average annual alpha since 2003 has been just 0.1%.


3 thoughts on “G3 Recap 3-30-11

  1. i fail to see the point in folks putting money into equity related hedge funds … just buy an ETF on the part of the market you think will outperform on a rolling basis … special situation funds or private equity though may have more edges.

    i liked Hoenings comment yesterday focusing on the impact of loose FED policy on increased commodity prices but this should also be about loose policy everywhere … i wonder how much of the worlds GDP since early 09 is driven by negative real yields or the money illusion … and i would think a fair degree so call me a skeptic … but that does seem to be core policy directive.

    fed, ecb, boe, and chinese banks balance sheets coupled with negative real rates everywhere bar japan equals a whole lotta cheap liquidity.

    1. Thanks for the link Bert. I’d like to look at both the special sit and pe funds in more detail in the future. I also looked at macro funds – their returns have also come down sharply but is much more difficult to model, suggesting a higher likelihood of the presence of alpha.

      Let’s see how the ECB’s hike next week affect markets. I think we’ll get a chance to learn a bit about positioning then.

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