It is said that Edward O. Thorp was able to harness small correlations for reliable financial gain. I've seen some strategies based on strong correlations which did not seem particularly reliable. Does anyone have an idea or a paper to how the small correlation exploitation could work? I can only think of some kind of relative value arbitrage.
Correlations between what?
Correlations between stock A and another stock B - relative value arbitrage - not sure if small correlations will help here.
Correlations between stock A and its future stock return Ra - its called Information Coefficient. Try Fundamental Law of Active Management and many similar web info on Fundamental Law for more information.