Correlations Augur for Asset Class Diversification

A recent article in The Wall Street Journal supports our earlier assertion that equity sectors are becoming highly correlated. According to the WSJ article, macro events such as the European sovereign-debt crisis and a slow-moving U.S. economy won’t be resolved anytime soon. As a result, the inner workings of the equity markets will likely have no reason to decouple from one another in the near- or intermediate-term.

Although this may be bad news for equity long-short hedge funds, asset allocators should have a field day. Stock-bond should remain highly uncorrelated for the foreseeable future, adding valuable diversification to well-rounded portfolios (long-dated T-bonds are up over 15% YTD through Friday, FYI). Managed futures should also be considered a safe harbor, especially if equity volatility sticks around for the fourth quarter.

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