Acadian Asset Management revisits diversification, arguing that despite recent disappointment, it remains essential but widely misunderstood in modern portfolios. The paper challenges the idea that adding alternatives improves outcomes, noting many strategies behaved like equities in Q1 2020, exposing hidden concentration risk and forcing a rethink of what diversification actually delivers.
Re-examining Diversification: 20/20 Perspective
Acadian
Research
8 Pages
Key Takeaways
Illusion Of Diversification: Many alternative allocations failed during Q1 2020, with correlations spiking toward 1.0, revealing portfolios were less diversified than investors believed.
Alternatives Underperformance Reality: Over the past 25 years, increased allocations to alternatives did not consistently outperform a traditional 60/40 portfolio after fees and complexity.
Three Pillars Framework: Effective diversification requires improved risk measurement, broader opportunity sets, and stronger portfolio construction, especially as equity exposure in portfolios has risen above 60%.
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