New asset classes needed

Added 6th June 2013

Asset class correlation has increased substantially over the past five years and the majority of fund managers now cite it as one of their key investment risk factors, according to a study by CRISIL Global Research & Analytics (GR&A).

New asset classes needed

A total 88% of global asset managers taking part in the study stated that correlation was one of their top five risk factors.

Alpha under threat

The increase in correlation among traditional asset classes has been accompanied by a decline in returns, and 65% of participants in the study stated it is causing a material, negative impact on the availability of alpha-generating opportunities.

The proportion of stocks providing returns greater or less than +/-30% has fallen from 42% between 1998 and 2002 to 19% between 2008 and 2012. Assuming that extremes are the best alpha-generating opportunities, the prospect of outperformance and benchmark beating returns is significantly below the level it was five years ago.

New wave correlation

The research found even traditionally uncorrelated assets have seen a rise in correlation and converging returns. Multi-asset funds which generally invest in alternative assets have been found to converge with the MSCI World Index, which is an equity index.

Earlier in the year we reported alternative assets may be damaging returns because of the correlation of the underlying assets across the portfolio.

Suresh Krishnamurthy, director, CRISIL GR&A, said: “We see this becoming a trend. As newer, non-correlated assets emerge we see them eventually getting correlated and offering lower alpha potential over time. This calls for a health pipeline of new-age alternative assets to emerge.”

New asset class

CRISIL GR&A said it believed correlation could emerge as an investible asset class of its own in a similar way volatility has transformed from a risk factor to an asset class.

 

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