13 June 2022
by Hasan Aslan

Correlations instability calls for adaptive multi-asset investing

Regime shifts come with higher volatility

The massive fiscal and monetary support across the globe, particularly in developed economies, to address Covid-19 impact had a strong positive effect in the first instance. In a second phase, the inflation feedback loop started to kick in as supply chain disruption and higher demand persisted. On top of that, Russian invasion of Ukraine has put oil on the fire. The inflation fight has now become a priority for central banks, resulting in an increased volatility environment for risk assets. The ability of high duration assets to protect global portfolios is being diminished now. The below chart illustrates the increased fixed income and equity volatility path currently in place, as illustrated by the VIX Index (equity volatility) and MOVE Index (treasury volatility).

VIX Index vs MOVE Index

Source: Bloomberg, RAM AI, as of 30.04.2022

The performance of a traditional 60% equities and 40% bonds portfolio[1] exhibits a negative performance of slightly over 10% YTD as at the end of April 2022. While the higher yield level of bonds provides some protection against further adverse move in interest rates, the pace of the monetary policy adjustment and the resulting correlation breakdown between asset classes remains the major concern. In such a context, the traditional Multi-Asset portfolio composed of equity and bond exposures mainly might well continue to be subject to jolts. At RAM AI, the analysis of correlations fluctuation between asset classes and factors analysis play a key role in the construction of our multi-asset strategies. In that respect, we believe strategies which were put into “hibernation” for more than one decade due to ZIRP (zero interest rate policy) deserve a particular attention today.

Liquid alternative strategies and risk mitigation as key components in multi-asset

For alternative strategies to thrive, a higher dispersion environment is a necessary condition. There’s a clear relationship between the level of inefficiency in financial markets and the interest rate level. As an example, low net fundamental equity strategies most capitalize on inefficiencies when investors focus on the cashflow generation ability and the debt servicing ratio of companies. We are now at this juncture as higher financing costs for companies will undeniably bring equity discrimination back to the center. Relative Value Rates & Credit, Convertible Arbitrage; Macro/CTA and Event Driven are also amongst the strategies we favour. The following chart shows the performance of hedge funds (HFRX Global Hedge Fund Index) over 2009-2021 period in a risk/return framework. We expect the return potential of alternative strategies to shift up in this investment cycle and the opposite effect for equities and bonds.

Risk Return Profile by Strategy

Source: Bloomberg, RAM AI, from 31.12.2009 to 31.12.2021


During the extreme events of the past two years tail risk hedging strategies played an important role in mitigating portfolio losses. Not all negative events will experience a V-shaped recovery and downside risk mitigation strategies deserve a permanent allocation in a multi-asset portfolio in our view, especially in a phase where the volatility regime has shifted and correlations between assets exhibit instability.

RAM MA Approach Illustration

[1] Global EUR-based portfolio composed of 60% MSCI World NR TRN Index EUR Hedged and 40% Bloomberg Global Aggregate TR Index EUR Hedged.

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