Market Correlation

Integrating market correlation into risk-adjusted return

In the March issue of Risk Management for Investors, Marc Goodman, Kenneth Shewer and Richard Horwitz presented findings from their research on hedge fund diversification. In this article, they propose an ‘enhanced Sharpe ratio’ that supports their rationale

Institutional and high-net-worth investors are increasingly considering alternative investments, as their expectations for returns from equities range from low to bleak. They are looking for investments that are not correlated with the equity market, that is, investments that can perform well in any environment, but particularly when their traditional long-only equity investments are not producing adequate returns. This is difficult because, as the world has become more global, international markets have become more correlated. Diversification is thus more difficult to achieve, and it is more valuable than ever.

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