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By Beverly Chandler, Opalesque London:

Recent research from the research team behind the Advanced Modelling for Alternative Investments chair at the EDHEC-Research Institute shows that managed futures’ much vaunted propensity for low correlation with traditional assets, may be overstated.

The study examined correlation between managed futures strategies and the S&P 500 and found that over specific periods the correlation between the two investment pools could be quite high. "Previous research has shown that the distribution of estimated pairwise correlations is broad and symmetrical when the true correlation is low (i.e. large sampling error). Given a correlation of -0.16 between the Newedge CTA Index and S&P 500 since January 2000, we should expect to see periods of relatively high positive correlation" the study says.

Despite this, the researchers felt that intervals of increased correlation would have real implications for a portfolio of diversified trading strategies. Using the returns of the S&P 500 and the Newedge CTA Index conditional on periods of relatively high correlation, the research showed that CTA returns appear to be independent of S&P 500 performance irrespective of correlation levels. They also found that when correlations between the two indices are high, the S&P 500 exhibits significant positive performance.

The team’s first graph, Exhibit 1, shows the 63 ......................

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