New York (HedgeCo.net) Last week was brutal for stocks as the S&P lost 5.77% for its worst weekly performance since September 2011. While the overall market was getting hit, several models on the HedgeCoVest platform performed very well. Of course the short-only composite models did well with all ten main sectors falling, but those aren’t the models we are talking about that did well.

In this case, we are talking about a group of fund manager models with the lowest correlations. The Cognios Market Neutral 2X model, the Cornerstone US Long/Short Alpha model, the Ferro Systematic Market Neutral model and the Probabilities Long/Short Equity model had the four lowest correlations and that was reflected by their performances last week.

The Ferro model performed the best last week with a gain of 1.61% and the Probabilities model gained 0.24%. Meanwhile the Cornerstone model lost a meager 0.15% and the Cognios 2X model lost 0.62% on the week. When you compare these returns to those of the overall market, you begin to understand what hedge funds are all about and how they are trying to generate returns that aren’t correlated to the market and trying to reduce risk at the same time.

When you are comparing models and considering which ones to invest in, you will want to look at the correlation to the overall market. If you are building a portfolio using multiple models, you don’t want a group of models that all have high correlations to the market unless you are extremely bullish on the overall market. If you are bearish on the overall market and want to build a portfolio using multiple models, you will want the models with the biggest negative correlations.
If you want a truly neutral portfolio, build a portfolio of models where the correlations are as close to zero as possible. That is a portfolio that is truly market neutral and can perform well in any kind of market.

Rick Pendergraft
Research Analyst
HedgeCoVest