Correlation of short vs long ETFs, again: the curious case of the ProShares UltraShort Real Estate fund

The correlation regimes of short vs long ETFs is making headlines! The WSJ today (http://online.wsj.com/article/BT-CO-20090806-718802.html) reports a lawsuit against the sponsors of the ProShares UltraShort Real Estate fund (SRS), a short real-estate ETF that fell about 48% from Jan. 2, 2008, to Dec. 17, 2008, when the reference index, The Dow Jones US Real Estate index, fell as well by about 39.2%.

We saw in an earlier posting that the relationships of some short ETFs w.r.t. their corresponding longs suddenly changed at the end of 08 -- although those we looked at did stay in an inverse relationship, the short increasing in value when the index fell, and reciprocally.

The Bloomberg screen shot below shows the relationship between the value of SRS and that of an ETF representing the index, up until Dec 1, 2008. The relationship until end of 08 was almost normal and relatively strong (R squared of 66%), although the relationship shifted dramatically in the second half of 08.

(Click to enlarge)

Then something went indeed bad sometime at the end of 08 or early 09. In this second screen, the blue dots correspond to the period from Dec 2, 08 to yesterday August 6, 2009.

As can be seen, SRS crumbled together with the long ETF representing the underlying index.