Risk-On/Risk-Off: The Correlated World

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Frank Voisin
Apr 23, 2012
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HSBC generated two heat maps that show the correlation matrix of various asset classes pre-Lehman and post-Lehman. If these dont illustrate the Risk-On/Risk-Off (RORO) hell that weve been living through for the last few years, I dont know what does.

Pre-Lehman Correlation Matrix, HSBC

Post-Lehman Correlation Matrix, HSBC

HSBCs conclusions, courtesy of the FT:

  • Many managers feel that with so many assets now moving in tandem, the whole investment process is broken;
  • but RORO is here for a good while longer since it reflects a world where markets are pricing in the bimodal nature of QE and other policy responses to the crisis;
  • so asset managers need to adapt, be that through a more imaginative approach to diversificaiton [sic] or simply accepting that the RORO trend is their friend.
What do you think?

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