Diversification and decorrelation

Tue Oct 6, 2009

It was Dr John Lintner of Harvard University who famously documentedthe diversification properties of managed futures in his landmarkstudy, "The Potential Role of Managed Futures Accounts in Portfolios ofStocks and Bonds", published in 1983. "The combined portfolios ofstocks (or stocks and bonds) after including judicious investments[...] in leveraged managed futures accounts show substantially lessrisk at every possible level of expected return than portfolios ofstocks (or stocks and bonds) alone," he wrote.

If that was something that most institutions thought theyunderstood, last year’s turmoil came as a profoundly unsettlingsurprise. That is because the principal shock of 2008 was not, perhaps,how poorly some hedge fund strategies performed, but how closelycorrelated their returns were with other asset classes that theirclients were aiming to diversify away from.

"If you look at the evolution of the alternative investmentmanagement sector over the past five years, a whole new range of exoticstrategies has been created,...

ISSN: 2151-1845 / CDC10004H


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