Lagged asset correlations, a thought experiment

Suppose I start a fund that imposes a 1-day withdrawal lead time, and takes your money and invests it in the S&P 500 on day 0, but then reports the day 0 return as the day 1 return, the day 1 return as the day 2 return, and so on, reporting the return on day 0 as 0. This fund has a return which is a tiny bit less than the S&P, but is completely uncorrelated on a daily basis. It would, however, have an almost perfect correlation on an annual basis, and that’s why you wouldn’t invest in such a thing. If you only used daily correlations when deciding whether to put this asset into your portfolio, you would have been greatly mislead!

If you optimized for track record Sharpe ratio you would actually invest in this stupid fund. That TYPE of smoothing is worthless though!

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