Last month, there was a post on another blog that I found interesting but did not get the time to re-post. In a chart after the Standard & Poor's downgrade of US credit rating, it shows that the correlation of the stocks in the S&P 500 had spiked to 0.85. This is higher than during the credit crisis of 2008. There were large declines of stock prices while volatility, cost of interbank borrowing and gold were high. These conditions increase the difficulty of managing an equity long/short hedge fund.
The measurement, Value-at-Risk (VaR), should be higher as the volatility increases. When correlation increases, then stock pickers find it very difficult to outperform the markets.
The source for the article can be accessed here.
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