Applying correlation analysis to private markets is hindered by:
The Trouble with Harry is one of the few comedic movies directed by Alfred Hitchcock. As it was released in 1955, it is not spoiling anything to reveal that the “trouble” was that the residents of a small town I n Vermont find a body (Harry Worp) on a hillside, and several of them believe they may have accidentally been responsible for his death.
Harry was dead the entire movie and was used primarily as a prop (so much so that the actor playing him, Philip Truex, did not even receive screen credit). Employing correlation analysis to private markets assets is analogous to Harry’s character, present in form but not particularly functional. There are several aspects of private markets including less frequently valued assets, the absence of an active market price, the dilution of portfolio returns as new assets are added, and the desire of fund managers to positively surprise limited partners, that lead correlation analysis to being less meaningful.
After a brief background, this paper uses a sample of public market stocks to replicate some of the structural aspects of private markets. This is not intended to replicate private market returns; rather, it is meant to show that applying analogous structural factors to actively traded public companies substantially reduces the measured correlation.