Diversification, Hedging and Protection in Portfolio Construction

Portfolio Topiary: Style and Shape Your Hedge Your Way

Portfolio construction, particularly the composition and correlation of the underlying components, may have a profound effect on the outcomes investors are likely to obtain. It goes without saying that in times of market stress, these components may not be entirely as uncorrelated as historical data might suggest and as recent evidence indicates, they may rise and fall in unison. The use of specific hedging, diversification, or portfolio protection strategies may mitigate some of the risks investors have recently realised exist within portfolios.

The run of poor performance from hedge funds over an extended period, when added to the fact that many appear to have returns closely correlated to equities in market stress conditions, may support  arguments for either a multi-asset, diversified strategy approach, or a strategy which involves explicit portfolio protection. Such an approach may provide a hedge against circumstances when all assets move in one direction at the same time.

The Active Manager's Conundrum (S&P Dow Jones Indices, 2020)

S&P Dow Jones Indices examines the difficulties active managers face as optimal conditions for active management, namely low volatility, high correlation and high dispersion, only occur in 2% of their monthly observations between end 1990 and end 2019.

A Case for Multi Strategy Q1 2020 (Janus Henderson Investors)

For compliance reasons, this paper is only accessible in the United States

Janus Henderson Investors explores why most 'hedge funds' have failed to deliver in times of stress and argue that consideration should be given to diversified, multi-strategy funds, together with associated protection strategies.

Are Multi-Asset Strategies Delivering for Investors? (bfinance blog, Apr 2020)

bfinance explores how diversified, multi-asset strategies performed during the recent market rout.

How to Evaluate Defensive Equity Strategies (Intech, 2020)

For compliance reasons, this paper is only accessible in certain geographies

Intech's eBook investigates the plethora of defensive equity strategies available, and differentiates between them, allowing comparisons to be made in terms of risk and return outcomes.

Equity styles and the Spanish flu (Robeco blog, Apr 2020)

Robeco takes a look at historical market corrections and which styles and strategies worked well in a correction-recovery cycle.

Diversifying Well: The most important investment strategy (Ray Dalio, 2019)

Ray Dalio explains why portfolio diversification is the most important things an investor needs to do in order to invest well.

Improving Portfolio Diversification with Single Factor Indices (Scientific Beta, 2020)

In this paper Scientific Beta explores how a portfolio might obtain diversification through the use of differing exposures to various macro economic regimes.

Can Diversification Help Weather the Coronavirus Storm? (MSCI blog, Apr 2020)

MSCI presents compelling numbers that suggest that diversifying an equity portfolio amongst factors, sectors and countries can indeed offer investors an element of protection in market downturns.

Actively Diversified: Harnessing multiple return sources (LGIM, 2020)

For compliance reasons, this paper is NOT accessible in the United States and Canada

LGIM suggests how diversification, particularly the inclusion of alternative strategies, could help the efficient management of return generation, risk management and liquidity.

Video: A closer look at explicit portfolio protection (Janus Henderson Investors, Mar 2020)

For compliance reasons, this paper is only accessible in the United States

In this video, Steve Cain, Diversified Alternatives Portfolio Manager, discusses how the addition of an explicit Protection Strategy within Multi Strategy portfolios may offer “crisis alpha” during extreme market conditions.

The Vix, Vol-Based Global Indexes and Trading Instruments (CFA Institute Research Foundation, 2020)

This paper from the CFA Institute explores, amongst other subjects, the use of VIX futures in portfolio construction and risk management.

A Modern, Behavior-Aware Approach to Asset Allocation and Portfolio Construction (Newfound Research)

The authors explore Modern Portfolio Theory in relation to portfolio construction techniques and asset allocation in an attempt to address behavioural biases than can creep into the construction process.

Overview - Designing More Defensive Solutions - A new solution that really is low volatility (Scientific Beta, 2020)

Scientific Beta details its robust dynamic defensive solution for equity portfolios.