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Opalesque Nordic Roundtable: Diversification by just having a passive allocation across asset classes is becoming less and less useful

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Diversification by just having a passive allocation across asset classes is becoming less and less useful

During the recent ten years we have seen a steady increase in correlation between basically all markets. You will find a very good illustration for the decreasing diversification by just looking at the daily moves of the S&P 500 index stocks from 1996 to 2008. During all those years, there were only 12 trading days when more than 490 of the S&P 500 stocks moved in the same direction on a given trading day. In 2011, there were 15 such days with nearly even up/down ratio – and that’s in just one year.

Since August 2009 we have had 17 negative months on the MSCI World Index, and out of 17 months, the broad HFRI Index simultaneously declined 14 times. That is a 80% down capture by the hedge funds. The beta is like 0.23 and the r2 is 76%, so it is very obvious there is too much correlation between hedge funds in general and the equity markets.

Many of the more well-known correlations in the market have totally shifted and actually very much resemble the situation we had in 1929. Also, given the global macro environment, investors can't really rely on a market beta going forward. Seeking diversification by just having a passive allocation across asset classes is therefore becoming less and less useful.

This new Opalesque Roundtable offers relevant insights why and how to invest in a diverse portfolio of active strategies and also addresses the issue of asset concentration into the largest, most well-known firms. For example, the asset concentration the managed futures space is quite astounding. At the moment, the 10% biggest managers have 90% of industry assets. Ten years ago, that number was 80%. You can show that having larger relative asset size negatively impacts your relative performance. The returns of such mega funds will basically be performing in line with the overall industry, which for allocators is a worrying sign.

The Opalesque 2012 Nordic Roundtable was sponsored by Salus Alpha and Eurex and took place August 31st in Stockholm with:

  1. Björn Österberg, Head of Research, IPM - Informed Portfolio Management
  2. Per Ivarsson, Head of Investment Management, RPM Risk & Portfolio Management,
  3. Sven Thorén, Portfolio Manager, Catella Asset Management
  4. Carl Meurling, CEO, EME Partners
  5. Werner Braunöck, Portfolio Manager and Co-Founder, Verto Invest
  6. Ulf Sedig, Co-Founder, Merrant Fund Management
  7. Oliver Prock, CEO/CIO and Founder, Salus Alpha
  8. Renaud Huck, Senior Vice President, Eurex
discussing:
  • Opportunities for alpha strategies in Eastern Europe and Iceland
  • What is the Nordic investor base like?
  • Investment opportunities coming out of regulations & in the evolving manager space
  • Why concept of alpha and beta still puzzles physicians and academics worldwide
  • Do Russian financial markets really need that much “reform” as Western media like The Financial Times or The Economist write? How have the Russian financial markets done since 2008?
  • Why Salus Alpha abandoned technical analysis when designing trading systems and moved to statistics
  • How Eurex Exchange will protect buy side collaterals and positions in case of default of a clearing member
  • Why value strategies may reap outsized returns in the coming five years

Access the Opalesque Roundtable Series - Nordic Region 2012 | Download here

The Opalesque Roundtable Series offers unparalleled intelligence on the most important global hedge fund jurisdictions and their players. The Roundtable Series is a free publication from Opalesque and is continually updated. Please scroll down to view the full selection of our Roundtables - covering the globe!

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User comments

No question, traditional asset classes have become more correlated both within each asset class and among asset classes. I discuss this in my book and talk about the ability to use "return drivers" to establish true portfolio diversification. As I point out in the book, asset classes are simply long-only trading strategies that do not attempt to disaggregate their many separate return drivers. They are archaic artifacts that were necessary to simplify diversification in the past but are unnecessarily self-limiting today. If you'd like to read more I'm pleased to provide complimentary link to the relevant chapter in my book:
http://bit.ly/qG6oNE mike dever |   October 01, 2012 05:26:40 PM
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