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Benedicte Gravrand, Opalesque Europe:

Many investors reportedly suffered more losses than expected during the credit crisis, in portfolios which they thought were well diversified with low correlations. This is because correlation between strategies can increase in stressed environments.

GFIA pte ltd, a Singapore-based specialist in skill-based managers in Asian and emerging markets, released yesterday a paper on how the correlation between different hedge fund strategies and their benchmark indices within a seemingly diversified portfolio changed during the credit crisis. The firm found that correlations increased dramatically after October 2007, as indeed during the credit crisis, there was a strong tendency for almost all hedge fund cross- and index-correlations to converge on one.

Thus the measured correlations for the period between 2001 and 2010 would have been misleading if used as a forecast of portfolio diversification.

The research house found that the low correlations between Asian hedge fund strategies seen between 2001 and 2007 generally exploded in the crisis, with an average increase in correlation of 0.31, making most strategies effectively correlated. Also, many strategies suddenly became highly correlated to their underlying indices.

Peter Douglas, the founder of GFIA, said: “Whereas the Asian hedge fund universe had always been helpfully uncorrelated, facilitating effective portfolio......................

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