Rev. Date August 18, 2023

What is the Investment Correlation tool?

The Investment Correlation tool displays the correlation between the returns of the selected investment and those in the organization’s master portfolio. For portfolios, pairwise correlations of investments within the portfolio are displayed.

Downside correlations are also available in Studio or Report Lab.

For daily returns, correlations are calculated using the rolling 5-day average returns for both the investment/portfolio and benchmark to minimize the impact of market asynchronicity.

How are the investments sorted?

The return correlations are sorted from largest to smallest portfolio allocation. If there are more than 20 investments, the remaining investments are not shown.

Source: Venn analysis of Demo Portfolio. June 2023.

What does the “Use Residual” toggle do?

By default, the Investment Correlation tool has "Use Residual" turned off. In this state, the correlation displayed is between the totalreturns of the selected investment and the investments in the master portfolio, or investments within a portfolio. If "Use Residual" toggle is turned on, the tool uses the Two Sigma Factor Lens to determine the residual returns of all the investments independently and then displays the correlation between those residual returns.

Over what time period are the correlations calculated?

The Investment Correlation tool finds the longest overlapping period between the selected investment and those in the organization’s portfolio, and down samples to the lowest frequency. It requires at least 12 data points to run the analysis.

What does the benchmark row represent?

At the top of the Analysis Tearsheet, a user can select a benchmark. For individual investments, Venn will show the correlation of the investment and all investments in the master portfolio against the benchmark. For portfolios, Venn will show the correlation of all underlying investments against the benchmark set at the portfolio level, not the benchmark of the individual investments.

What happens if Relative to Benchmark is toggled on?

In this case, the tool will show how the return of the investment over the selected benchmark compares with the returns of the other investments in the master portfolio over the same benchmark. For portfolios, correlations of all underlying investments’ excess returns with respect to the portfolio's benchmark will be displayed. It makes sense to run this type of correlation analysis when all of the investments in the portfolio or strategy should be measured relative to the same benchmark.

This document highlights certain aspects of this feature. As an overview, it does not discuss all material facts or assumptions. Please see Important Disclosure and Disclaimer Information.