I was just reading about the core-satellite approach to constructing portfolios when I came across a note that read (I paraphrase): managers’ total returns will likely have a positive correlation because their portfolio values will go up or down together (depending on the overall market), while their active returns will likely have negative (or zero) correlation because when one manager’s active return is positive another’s is likely to be negative (and vice-versa).
This note is, to put it bluntly, garbage. It demonstrates nothing more than that the author has no understanding of correlation, or of the difference between prices and returns.
I hate it when finance people get things so wrong. This happens frequently with correlation and frequently with beta. It’s enough to make one tear out one’s hair. (Note: thank goodness I have enough hair that I can tear out some without permanent deleterious effect.)
Negative correlation of returns does not mean that when one is positive the other is negative. It means that when one is above its mean, the other is likely to be below its mean. But both means can be positive.
Morons!