LTCM’s diverse positions showed observed correlations below 0.1 over five years.

Evidence

LTCM’s positions were geographically dispersed, and in instruments of very different kinds. (See table 8.3 below for an example of the typical range of its major positions.) At the level of economic fundamentals, little if anything connected the spread between U.S. government bonds and mortgage-backed securities to the difference between the prices of the stock of pairs of companies such as Royal Dutch and Shell, the idiosyncrasies of the Italian bond market, the bulges in the yen yield curve, or the chances of specific mergers’ failing. LTCM was aware that its own and other arbitrageurs’ involvement in these diverse positions would induce some correlation, but nevertheless the observed correlations, based on five years’ data, were very small-typically 0.1 or lower. — Donald MacKenzie, An Engine, Not a Camera, 997