Protect Your Portfolio with Alternative Investments

It is not easy to find strategies that are uncorrelated equities and bonds. Many of the alternative asset classes, like private equity and hedge funds, are highly correlated

Gordon Rose, CIIA, CAIA, 19 March, 2014 | 9:52AM
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In part five of our equity risk management strategies series we discussed how to protect a portfolio from market drawdowns. In this, the last instalment of the series, we focus on the role alternative asset classes can play to manage equity market tail risks.

Hedge funds could be a useful addition to a portfolio

Besides implementing any of the strategies discussed earlier in this series, investors could also make use of alternative asset classes to reduce tail risks. This is because, in theory, these alternative asset classes are designed to exploit – and profit from - traditional market inefficiencies. However, in reality, it is not an easy task to find strategies that are uncorrelated to traditional asset classes like equity and bonds. In fact, many of the so-called alternative asset classes, like private equity and hedge funds, are sometimes highly correlated to stock markets, which defeat the purpose of using them to manage equity market risk.

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About Author

Gordon Rose, CIIA, CAIA,

Gordon Rose, CIIA, CAIA,  is an ETF analyst with Morningstar Europe.

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