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Diversification, Hedging and Protection in Portfolio Construction

  • ,  Chief Executive |
  • 06 May 2020
  • Updated 07 May 2020

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.

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