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Correlations Augur for Asset Class Diversification
A recent article in The Wall Street Journal supports our earlier assertion that equity sectors are becoming highly correlated. According to the WSJ article, macro events such as the European sovereign-debt crisis and a slow-moving U.S. economy won’t be resolved anytime soon. As a result, the inner workings of the equity markets will likely have no reason to decouple from one another in the near- or intermediate-term.
Although this may be bad news for equity long-short hedge funds, asset allocators should have a field day. Stock-bond should remain highly uncorrelated for the foreseeable future, adding valuable diversification to well-rounded portfolios (long-dated T-bonds are up over 15% YTD through Friday, FYI). Managed futures should also be considered a safe harbor, especially if equity volatility sticks around for the fourth quarter.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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