Two heat maps from HSBC. The first is a typical correlation matrix across a range of assets in the world before Lehman collapsed. The second is post-Lehman. Red indicates strong positive correlation and blue indicates strong negative correlation. Greens and yellows appear when correlations are close to zero. Click each map to enlarge.
The more recent map features lots of deep reds and blues. Welcome to the world of RORO — risk on, risk off. It’s boring for financial journalists and maddening for investment managers.
HSBC has a big study out on RORO. You’ll find details in the usual place, but the gist is this:
- 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 or simply accepting that the RORO trend is their friend.
Here’s the phenomenon in chart form. Click to expand:
And here’s a video of Stacy Williams, HSBC’s head of FX quant strategy, discussing the matter. Click to play:
“The FX market has lost its anchor of reason” — FT Alphaville