CORRELATION

“Be cognizant that in a market meltdown there can be correlations among various positions in the portfolio that no one ever expects.” Josh Friedman

“When times get very tough, everything is correlated. And people need to sell whatever they have. And they sell what’s most liquid. So even the baby gets, you know, baby gets thrown out with the bathwater.” Bruce Berkowitz

"In times of stress, inevitably, markets that are not normally correlated, suddenly are.” Michael Steinhardt

"In crisis all asset classes become correlated. There is no such thing as having diversified, non-correlated portfolios. There you want to have hedges and you want to be liquid." James Dinan

“Through bitter experience, I have learned a mistake in position correlation is the root cause of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large.” Bruce Kovner

"When things go bad, all kinds of things correlate that no one ever dreamed correlated. And there’s nothing more deadly than unrecognized concentrations of risk, but it happens all the time." Warren Buffett

“Our strategy is to invest in such a way that there are as few correlations with market trends and among individual investments as possible.” Paul Singer

“It’s the rare investor who achieves the sophistication required to appreciate correlation, a key element in controlling the riskiness of an overall portfolio. Most investors think diversification consists of holding many different things, few understand that diversification is effective only if portfolio holdings can be counted on to respond differently to a given development in the environment.” Howard Marks

"When I have nine businesses in a portfolio, and I'm adding a tenth one, I think very carefully about the correlation the tenth one has with the other nine. I want the correlation to be as low as possible." Mohnish Pabrai

“Long/short funds typically don’t blow up because they made a bunch of wrong fundamental stock picks. They blow up because they’re overexposed to correlated sectors, or they own too many leveraged companies, or they have too many illiquid positions. These are ‘explanations’ you see all the time in funds' letters to investors. That’s exactly what we try to avoid.” Curtis Macnguyen

“In almost every case of catastrophic failure that we’ve observed, we believe the root cause can ultimately be boiled down to one or a combination of just five factors. The five factors are 1) leverage 2) excessive concentration 3) excessive correlation 4) illiquidity and 5) capital flight.” Zeke Ashton

“In bear markets, all to many investments turn into roach motels: ‘You can get in but you can’t get out.’ Correlations of otherwise uncorrelated investments will temporarily be extremely high. Investors in bear markets are always tested and retested. Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.” Seth Klarman

“If every position in the portfolio could be uncorrelated with every other position and also uncorrelated with the markets, we would be happy indeed. However, as the world does not work that way, we approach diversification and seek un-correlation in an incremental fashion.” Paul Singer

“I strive for approximately 100 different return streams that are roughly uncorrelated to each other.” Ray Dalio

“We endeavour to generate returns that exhibit little correlation to the equity markets.” Lee Ainslie

"It is very hard to only buy things and be uncorrelated to the stock market. But if you buy and sell in similar amounts you can." Cliff Asness

"The rule is to try hard to have uncorrelated strategies." Bruce Kovner

"Hidden fault lines running through portfolios can make the prices of seemingly unrelated assets move in tandem. Correlation is often under-estimated, especially because of the degree to which it increases in crisis. A portfolio may appear to be diversified as to asset class, industry and geography, but in tough times, non-fundamental factors such as margin calls, frozen markets and a general rise in risk aversion can become dominant, effecting everything similarly." Howard Marks

"I look at investing in terms of probabilities. There are no absolutes. We could have a 50 mile meteor come in and that would take out everything in the portfolio. There are events that could take out a lot of things. That's why you want to have uncorrelated positions." Mohnish Pabrai

"I don’t believe in hedging I thinks it’s a very destructive concept. If you think you have too much risk in portfolio, the last thing you want to do is add S&P shorts etc. When you get into chaos, historic correlations break down and you want low gross in your portfolio." Stanley Druckenmiller

"To the extent possible, I have the responsibility to structure the portfolio such that if any of a number of unforeseen events occur, that I do not lose the whole, or even a significant portion of client's money. To do this, I seek to minimize the correlation between the intrinsic values of the various securities held in the portfolio. Minimizing this correlation involves a bit of diversification among industries. Minimizing this correlation does not involve straying from sound principles of securities analysis. Including speculative or overpriced stocks in the portfolio simply to diversify against the impact of an array of possible external shocks is simply irrational given the relative odds involved. Moreover, minimizing the correlation does not require a portfolio of more than fifteen or so stocks. Therefore, a relatively concentrated portfolio may offer decent protection against unforeseen adverse future circumstance." Michael Burry

"We scrutinize correlations within the fund to ensure that no one industry accounts for a disproportionate share of assets and to minimize overlap between closely related industry groups. We also run investments through a global macro overlay. This is not because we are top down investors but because we want to stress-test our portfolio against a variety of macroeconomic outcomes." Jake Rosser

“Uncorrelation is a wonderful element to add to an absolute return seeking portfolio. Because if you are doing something that has a pattern of risk and return, even if it is volatile, even if it’s binary - make a lot, lose a lot - that has a pattern of returns that doesn’t have anything to do with the course of the stock or bond markets or anything else in your portfolio, that’s an elegant part of the mix.” Paul Singer

"People think that a thing called correlation exists. That’s wrong. What is really happening is that each market is behaving logically based on its own determinants, and as the nature of those determinants changes, what we call correlation changes... Correlation is just the word people use to take an average of how two prices have behaved together. When I am setting up my trading bets, I am not looking at correlation; I am looking at whether the drivers are different. I am choosing 15 or more assets that behave differently for logical reasons. I may talk about the return streams in the portfolio being uncorrelated, but be aware that I’m not using the term correlation the way most people do. I am talking about the causation, not the measure.” Ray Dalio

“One should not be heavily influenced by historic correlations. Just because the stock market went up 80 percent of the time after the Mets won a doubleheader doesn’t mean it will go up the next time. Try not to confuse chance with cause and effect.” Bennett Goodspeed

“The risk of spurious correlations, ephemeral correlations, confounding variables, or confirmation bias can lead to more dumb decisions than insightful ones, with the data giving us a confidence in these decisions that is simply not warranted.” Rory Sutherland