New York (HedgeCo.net) We have dedicated several articles to the topic of correlation in recent weeks as the market has seen an increase in volatility and as the overall market has struggled.

For the record, the S&P 500 was down 6.94% in the third quarter and that is the worst quarterly performance since the third quarter of 2011. With that as the market environment, it wasn’t surprising to see that the top performing models on the platform also happened to have some of the lowest correlations. The number one performing article for the quarter was the Cornerstone US Long/Short Alpha model with a gain of 8.52% for the quarter and a gain of over 12% on the year. Cornerstone is featured in our model spotlight this week as a result of their status as the top performing model for the quarter. We should also mention that the correlation for the Cornerstone model is -0.15.

As for the other models, the second best performing model was Ashbury Behavioral Long/Short model with a gain of 6.31% during the third quarter. The correlation on the Ashbury model stands at 0.59 and that is the second highest among the models featured here. The third best performer was the Ferro Systematic Market Neutral model which gained 4.65% during the quarter and the model’s correlation is 0.01. Coming in as the fourth best performing model in the third quarter was the Cognios Market Neutral 2x model. The model gained 2.79% during the quarter and the correlation is 0.46. Rounding out the top five models is the Brookdale Defensive Long/Short model. For the quarter, the model was down 0.02% and it has a correlation to the market of 0.65.

We spoke with the managers of the models that were the top performers for a take on why they felt they were able to outperform the market during such a volatile time.

Ashbury Behavioral Long/Short-
“Most models with low correlation are built upon the relative value of securities and they tend to carry lower net exposure as a group, so they will perform best when the stock market loses trend uniformity and investors begin searching for value or cash flow. The third quarter definitely saw market internals break down in light of the economic downturn in Asia and the uncertainty around the Fed’s interest rate increase, so investors had to unwind a lot of positions in not-so-great companies – and this would typically mirror the positions that low correlation strategies had already taken.”
Eric McGill, Managing Director
Ashbury Heights Capital

Ferro Systematic Market Neutral

“Over the years, our system has tended to outperform the overall market when the CBOE Volatility Index (VIX) is above 20. The system is built to deal with volatility and that is what we saw in the third quarter. Despite the recent spike in volatility, the standard deviation for our model is a mere 7.1% and the correlation is about as close to zero as you can get with a reading of 0.02. That is a reflection of a true market neutral strategy and when the VIX spikes, that is when our system generates the most alpha.”

Jeff Ferro, Managing Member
Ferro Investment Management LLC

Cognios Market Neutral-
“Volatility in global markets this year has provided the opportunity for the Cognios Market Neutral Strategy to perform as designed by limiting drawdowns relative to the market and to provide returns regardless of movements in the overall stock market. Because our portfolio is beta-adjusted market neutral we have been able to hedge market noise and mitigate the impact of global market events on the portfolio. While past performance is no guarantee of future results, we are pleased that the strategy performed as expected so far this year adding real value to investors’ portfolios as the market changed course from its six-year bull run.”
Jonathan Angrist, Chief Investment Officer
Cognios Capital

Brookdale Defensive Long/Short

“We were able to profit from both, long positions and short positions during the August/September turmoil. On the short side, our valuation focused approach identified securities that were essentially “priced to perfection”. As market participants de-risked, these momentum-driven, valuation-rich securities were the first to be sold. For Brookdale, our success was from security and sector selection. Our defensive bias allowed us to better withstand the volatility compared to cyclically sensitive sectors such as materials and industrials.”

Adnan Rehmatullah, Fund Manager
Brookdale Capital, LLC

Entering the fourth quarter, there are a number of issues facing the market and investors seem to be on edge. However, investors don’t need to be on edge when they have opportunities to invest in alternative investment models like the five listed above. These models embraced the volatility and performed admirably in the third quarter and should the fourth quarter be just as tumultuous, these models should perform well again based on the low correlations.

Rick Pendergraft
Research Analyst
HedgeCoVest