The Long-Term Performance of Equity
Investment Strategies and the Correlation Trap

Abstract

This article aims to address the relationship between a measure of stock correlation and a decrease in the risk-adjusted performance of basic quantitative investment strategies. The author studied simple momentum, value, size, and mean reversion investment strategies in the U.S. stock market for the period from 1928 to 2012. The empirical results suggest that all strategies appear to be caught in a correlation trap, as they have the tendency to experience a decrease in risk-adjusted performance when the proposed measure of correlation increases. This effect is present over the whole study period, not restricted to the last few years.