I was in Chicago today for the Managed Funds Association’s Forum. The lunch keynote was delivered by Elizabeth Cheval, Chairman, EMC Capital Management, Inc. and was titled ‘Let’s Get Negative! Correlation and the Case for Managed Futures’.
Cheval’s presentation was easily one of the best I have seen in the industry. Tackling a subject like ‘correlation’ and making it user friendly is not easy, but Cheval hit the mark. Some highlights with more to follow in the next week:
1. She framed the conversation in two parts: 1.) Human Investment Psychology and 2.) The Mathematical Solution.
2. The psychology that led to the tech boom/bust influences our portfolios every day. The psychology that led to the tech bubble does not go away and it is still a useful example because it is in reach of short-term memory.
3. She outlined chronocentricity [from this book] or the inborn egotism that one’s own generation is poised on the very cusp of history. Everyone should see why she was speaking of this.
4. Her definition of correlation: the nominal measure of the tendency for two assets to concurrently under perform or over perform their average returns by the same number of standard deviations.
5. You want negative correlation as much as you can get it in your portfolio as long as the components added are positive returns.