Correlation Integrity
Unlike Real Estate, Timber, MLP's, High Yield, and Private Equity, Options have strong correlation integrity. Market participants only need to look back at the financial crisis to acknowledge that numerous asset classes had correlations that fell apart leaving portfolios undiversified at the moment when diversification was needed most.
The failure of asset classes to diversify portfolios during the crisis was the result of Naïve Diversification.
Over the past few decades, asset allocation decisions have claimed to further diversify portfolios by incorporating Real Estate, Timber, MLP's, High Yield, Private Equity, and select alternative strategies. However, the justification of achieving greater diversification with the addition of these asset classes was shown to be naïve as these asset classes proved to have significant levels of equity market risk embedded in them. The performance of these asset classes correlated to the equity markets during and after the financial crisis showing that few of these asset classes had real correlation independence.
Unlike Real Estate, Timber, MLP's, High Yield, and Private Equity, Options have strong correlation integrity. Market participants only need to look back at the financial crisis to acknowledge that numerous asset classes had correlations that fell apart leaving portfolios undiversified at the moment when diversification was needed most.
The failure of asset classes to diversify portfolios during the crisis was the result of Naïve Diversification.
Over the past few decades, asset allocation decisions have claimed to further diversify portfolios by incorporating Real Estate, Timber, MLP's, High Yield, Private Equity, and select alternative strategies. However, the justification of achieving greater diversification with the addition of these asset classes was shown to be naïve as these asset classes proved to have significant levels of equity market risk embedded in them. The performance of these asset classes correlated to the equity markets during and after the financial crisis showing that few of these asset classes had real correlation independence.