Sector Correlation and Volatility

The combination of low sector correlation and high volatility is rare. It is associated with periods of dramatic change to the economy. For hedge funds, these periods can be particularly challenging. When correlation is low, and volatility is high, even modest factor exposures can have a significant impact on performance.

In the past 18 years, we have only seen three periods when sector correlation was low and volatility was high for more than a single week: in 2008 during the Global Financial Crisis, at the start of the COVID crisis in 2020, and starting in March this year, when central banks began to tighten monetary policy.

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