Luxembourg, Luxembourg, August 13, 2011 --(PR.com
)-- Most diversification strategies appeared to fail following the collapse of Lehman Brothers in September 2008 because investors did not sufficiently distinguish between risky assets and relatively safe assets such as Gold, according to a recent analysis by Sauer Capital S.A..
"Traditional diversification did not provide the typical level of risk reduction during the 2008 financial crisis," said Willem Oris, senior executive of Sauer Capital global markets division. "One of the most frightening aspects of the 2008 crisis was that all risky assets sank in lockstep resulting in devastating losses. Our challenge is to craft a portfolio to withstand a perfect storm."
The Sauer Capital study concluded that investors would fare better during a period of high volatility and low liquidity such as the financial crisis that began in September 2008 by tactically following a three-pronged program:
Actively reducing market exposure,
Making passive investments in assets that historically have done well in market shocks, such as gold and
Implementing strategies that historically have done well during increasing volatility.
The Sauer Capital study noted that picking the right moment to reduce market exposure depends on correctly anticipating whether the economy will be adversely affected by the market downturn, which can be difficult to determine by measuring volatility levels alone. As a result, Sauer Capital is continuously analyzing methods to interpret stress events. Oris said, "Key to implementation of this approach is distinguishing between little shocks and super shocks, which is when it is especially important to identify safe assets."
The paper noted Gold performed especially well during flights to safety associated with previous spikes in equity volatility, and the 2008 episode conformed to this pattern. Traditional diversifiers such as real estate investment trusts and stocks have performed well only during periods of less-intensive shocks.
Strategies that tended to perform well during periods of increasing volatility include trend-following strategies, pure market-neutral strategies, statistical arbitrage, and high-frequency trading. These strategies seek to exploit the opportunities created by the market dislocation and the aftereffects of the shock on the economy.
Sauer Capital (http://www.sauercapitalsa.com) Asset Servicing offers clients worldwide a broad spectrum of specialized asset servicing capabilities, including custody and fund services, securities lending, performance and analytics, and execution services.
Sauer Capital S.A. is a financial services advisory company focused on helping clients manage and service their financial assets, servicing a worldwide client base and serving more than 100 markets. Sauer Capital S.A. is a leading provider of financial services for institutions, corporations and private individuals, offering superior investment management and investment services through a worldwide client-focused team. It offers fast execution through various types of accounts which are tailored to an individuals needs, both on an advisory or fully managed basis.