War of the Worlds (1938 version) unfolds on CNBC
May 6th, 2007 | Filed under: Hedge Fund Industry Trends, Media Coverage of Hedge FundsFor several hours last Wednesday, major media outlets seemed to be broadcasting a hedge fund remake of Orson Welles’ famous rendition of War of the Worlds. Indeed, this recently published article by the New York Fed did begin by acknowledging that the correlations between different hedge fund strategies “suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998.”
But the article goes on to say that “…hedge fund covariance has increased, but it is not at particularly high levels by historical standards.”
This story, and the back-peddling done by the media after initially freaking everyone out last week, amounts to both a commentary on the pop-culture surrounding hedge funds and a reminder of a deeper statistical phenomenon that often leads to erroneous conclusions about hedge funds.
First, the media story (the statistics themselves are covered in the posting below)…
In an apparent rush to get the story to air (or print) several mainstream media outlets picked up the Chicken Little angle and ran with it on Wednesday. Examples:
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[…] The report cites a NY Fed report that the media erroneously and prematurely interpreted as evidence of high correlation. As these three postings showed, that report actually pointed somewhat ironically to low volatility as the reason for this statistical phenomenon.   […]