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How Can Investors Achieve Diversification Today? Asset Concentration Into Large Managers Not the Way

Why and how to invest in a diverse portfolio of active strategies and also addresses the issue of asset concentration into the largest, most well-known firms.

New York, NY, September 28, 2012 --( Participants at a Nordic Hedge Fund Roundtable in Stockholm warned that global investors are increasingly challenged to achieve a meaningful diversification in their investments. The 23 page Roundtable script can be downloaded here for free:

Over the past ten years, correlations between basically all markets have steadily increased. A very good illustration for the decreasing diversification is the daily moves of the S&P 500 index stocks from 1996 to 2008. During all those years, there were only 12 trading days when more than 490 of the S&P 500 stocks moved in the same direction on a given trading day. In 2011, there were 15 such days with nearly even up/down ratio – and that’s in just one year.

Since August 2009 the MSCI World Index had 17 negative months, and out of 17 months the broad HFRI hedge fund index simultaneously declined 14 times. That is a 80% down capture by the hedge funds. The beta is around 0.23 and the r2 is 76%, so it is very obvious there is too much correlation between hedge funds in general and the equity markets.

Many of the more well-known correlations in the market have totally shifted and actually very much resemble the situation we had in 1929. Also, given the global macro environment, investors can't really rely on a market beta going forward. Seeking diversification by just having a passive allocation across asset classes is therefore becoming less and less useful.

How can investors achieve diversification today? Asset concentration into large managers not the way
This new Opalesque Roundtable offers relevant insights why and how to invest in a diverse portfolio of active strategies and also addresses the issue of asset concentration into the largest, most well-known firms. For example, the asset concentration the managed futures space is quite astounding. At the moment, the 10% biggest managers have 90% of industry assets. Ten years ago, that number was 80%. You can show that having larger relative asset size negatively impacts your relative performance. The returns of such mega funds will basically be performing in line with the overall industry, which for allocators is a worrying sign.

The Opalesque 2012 Nordic Roundtable was sponsored by Salus Alpha and Eurex and took place August 31st in Stockholm with:
1. Bjorn Osterberg, Head of Research, IPM - Informed Portfolio Management
2. Per Ivarsson, Head of Investment Management, RPM Risk & Portfolio Management,
3. Sven Thorén, Portfolio Manager, Catella Asset Management
4. Carl Meurling, CEO, EME Partners
5. Werner Braunöck, Portfolio Manager and Co-Founder, Verto Invest
6. Ulf Sedig, Co-Founder, Merrant Fund Management
7. Oliver Prock, CEO/CIO and Founder, Salus Alpha
8. Renaud Huck, Senior Vice President, Eurex
· Opportunities for alpha strategies in Eastern Europe and Iceland
· What is the Nordic investor base like?
· Investment opportunities coming out of regulations & in the evolving manager space
· Why concept of alpha and beta still puzzles physicians and academics worldwide
· Does Russian financial markets really need that much “reform” as Western media like The Financial Times or The Economist write? How have the Russian financial markets done since 2008?
· Why Salus Alpha abandoned technical analysis when designing trading systems and moved to statistics
· How Eurex Exchange will protect buy side collaterals and positions in case of default of a clearing member
· Why value strategies may reap outsized returns in the coming five years

The 23 page Roundtable script (PDF) can be downloaded here for free:

The Opalesque Roundtable Series highlights fundamental developments within the global hedge fund and alternative investment industry, a full archive with over 70 Roundtable scripts can be accessed here:

Matthias Knab, founder of Opalesque and internationally recognized expert on hedge funds and alternatives, moderates the Opalesque Roundtables.
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Matthias Knab

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