15 minutes with: Stacy Williams, HSBC

Cross-asset correlation has been locked at high levels for much of this year, as a continued drip of bad news has rocked financial markets. This may present opportunities for global macro hedge funds willing to bet on the break of certain correlations, but is playing havoc for those pursuing relative-value strategies.

Spooked investors have pulled money out of certain assets en masse and piled back into them as sentiment improves – contributing to a so-called risk-on/risk-off phenomenon. This kind of occurrence is not unusual during the middle of a crisis, when correlations tend to move to extremes. What is different this time is that volatility levels have fallen since May, when the eurozone sovereign debt crisis was at its peak. Despite this, cross-asset correlations remain stubbornly high.

A research note published by HSBC in August uses a series of heat maps to illustrate the phenomenon. The dark red parts of the heat map show strong positive correlations, while the dark blue segments represent strong negative correlation. Viewing the evolution of the financial crisis through the lens of the heat maps demonstrates how correlation is affected by severe market shocks, and the extent to which correlation remains to this day.

In this video interview, Christopher Whittall, staff writer at Risk magazine, discusses the research with Stacy Williams, head of quantitative strategy for foreign exchange at HSBC.