Portfolio Diversification Theory
Multi-Advisor Portfolios
Modern Portfolio theory has application to the overall investment portfolio for the individual as well as within the asset class itself. Just as your stock portfolio may be diversified, so too should your alternative investments using managed futures. Many investors select professional trading managers which not only are non-correlated to the S&P 500TR but also are non-correlated to each other.
The chart is for illustrative purposes and is not necessarily an investment recommendation among advisors. Past Performance is not necessarily indicative of future results.
What is Multi-Advisor Portfolio Diversification (MAPD)?
MAPD is a practice whereby you divide your managed futures portfolio using different advisors, taking into account different assets, strategies and markets. To put it simply, this is the application of the popular idiom, “Don’t put all your eggs in one basket” or in this case, don’t place all your risk capital with one advisor when the opportunity for diversification among managers exists.
To measure how “diverse” two investments are, financial statisticians have developed a Correlation Coefficient. This is a number that ranges between -1 and 1. If two investments have a Correlation Coefficient of 1, then they have a direct relationship. If one moves, the other will move in the same direction. The two investments may or may not influence each other, but the same underlying factors influence their returns. Conversely, if two investments have a correlation of -1, then they move with an indirect relationship. Market factors that have a positive effect on one will have a negative effect on the other. A correlation of 0 means that the performance of two investments cannot be explained by the same market factors.
Other factors to take into account when diversifying among managers are markets traded, strategy, and other performance measures available in the manager’s tear sheet and disclosure document. It is important to note that while diversifying your investment portfolio can potentially reduce your overall risk, it will not eliminate it. There is a certain amount of inherent risk in all investing that cannot be removed. Furthermore, profits will never come without some risk of loss.
Call your Alternative Investment Specialist if you’re interested in viewing specific managed futures managers. Or you can review our database of over 300+ managers with varying degrees of correlation.
An investor can choose to create a portfolio of Trading Managers (CTAs) within one portfolio. Our alternative investment specialists can create a blend of managers for you and can show you what the statistics would be when all the managers track records are combined. This is a powerful tool to evaluate the use of multiple managers. Our specialists are happy to work one-on-one with you to select managers and provide multiple advisor analysis reports.
Modern Portfolio Theory is a concept introduced by Harry Markowitz in 1952, which asserts that investments in an asset class based on its own merits is not sufficient. Instead, a portfolio should be constructed based on how an asset is expected to perform relative to other investments in the portfolio. According to Markowitz, a collection of uncorrelated assets can lead to less portfolio volatility, as losses in one asset class would be offset by gains in other asset classes.
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