Diversification is not a free lunch

Diversification is not a free lunch

Donald Pepper

Co-CEO & Head of Multi-Strategy

Donald Pepper

Co-CEO & Head of Multi-Strategy
Donald joined Trium Capital as Co-CEO in 2017. He took on the role of Head of Multi-Strategy in October 2024, having been on the Multi-Strategy Investment Committee for several years prior to this. He began his career at Goldman Sachs in 1987 in Fixed Income. In 2000, he started to focus on Hedge Funds in Prime Brokerage at Goldman Sachs and Merrill Lynch, where he was Managing Director of Prime Brokerage in EMEA until 2008, when he moved to become Head of Hedge Funds at New Star Asset Management and Henderson Global Investors, His responsibilities included being Co-Portfolio Manager of two Multi-Strategy Hedge Funds. In 2010, Donald moved to TT International as Investment Director before joining Old Mutual Global Investors in 2012 as Managing Director of Alternatives, where he was a member of the Quarterly Investment Committee and the Style Premia Investment Committee. Donald read Philosophy, Politics & Economics at The Queen’s College, Oxford, where he received an MA. He is a CFA Charterholder and holds the CFA Certificate in ESG Investing.
Trium Multi-Strategy UCITS
Trium Multi-Strategy UCITS Fund

Latest Insights

Share on

Trium Multi-Strategy UCITS

Warren Buffett, one of the greatest investors of our lifetime, once said, “Diversification is a protection against ignorance.” Diversification among financial assets or investment strategies is designed to mitigate investor portfolio losses. The simplest form of diversification, advised by many wealth managers and financial planners, is the 60/40 balanced portfolio. A 60% allocation to equities is used for long-term capital appreciation, and the remaining 40% used to purchase bonds that will earn continuous income for investors.  

The central assumption behind the 60/40 portfolio is based on modern portfolio theory. The alleged diversification should protect the portfolio when concerns over economic growth arise. The premise is that equities will underperform due to lower earnings, and bonds will rally as central banks will lower rates to stimulate economic growth. Therefore, bonds act as a buffer as yields drop and prices rise. An investor holding a passive 60/40 portfolio since 1980 will have reaped a compelling annualised return of 8% and beat average inflation by five percentage points over that period.  

Source: Source: Bloomberg, Trium. Data from January 1980 to August 2024. Inflation data is as of July 2024. Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU).

Theory ≠ Practice

“In theory, there is no difference between theory and practice – in practice, there is.” – Yogi Berra (ex-baseball manager)

In theory, earning a real return of 5% appears to be an excellent proposition and long-term investors should pay attention to modern portfolio theory and hold 60/40 portfolios. Unfortunately, investors rarely have 40-year horizons. Data suggests that holding periods for equity investors average around 5.5 months, down from a 5-year horizon in the 70s. 

Source: IMF, Trium. Calculated as the NYSE and NASDAQ market capitalisation divided by total turnover value.
 

If investor holding periods are that short, has the 60/40 portfolio met their needs the past few years in a rising inflation environment? The results suggest that a passive allocation has not, delivering just 5% annually.

Source: Bloomberg, Trium. Data from January 2021 to August 2024. Inflation data is as of July 2024. Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU)..
 

The two culprits behind the negative real return are (i) the underperformance of the fixed income component as central banks hiked rates to tame inflation and (ii) the self-made invalid assumption that correlations are stable over time. Rolling correlation data shows that equities and fixed income have moved together often in recent years. . 

Source: Bloomberg, Trium. Data from January 1976 to August 2024 Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU)..

 

Passive investment diversification has not always been a free lunch. Fixed income and equities are only negatively correlated when core inflation is well below 2.5%. 

Source: Bloomberg, Trium. Data from November 1982 to July 2024. Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU).

More of the same

The lack of diversification has not been exclusive to bonds and equities in recent times. Below are rolling 3-year correlations of REITS and listed PE firms to a 60/40 portfolio. 

Source: Bloomberg, Trium. Data from December 2002 to August 2024. Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU) / REITS = MSCI World RETIRs Index / PE Firms = S&P Listed Private Equity Index.

Is there relief for passive investors?

“In order to be irreplaceable, one must always be different.” – Coco Chanel

One type of investment has proven to be very different to a 60/40 portfolio. The investment objective of a Multi-Strategy hedge fund is to deliver uncorrelated positive returns consistently over time. Multi-Strategy hedge funds combine market-neutral, event-driven and relative value strategies into a single portfolio to deliver idiosyncratic returns uncorrelated to the direction of markets. Diversification is at the heart of the portfolio, combining uncorrelated return streams to provide investors with steady returns over time.

Source: Bloomberg, Trium. Data from December 1999 to August 2024. Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU).
 

Modern Portfolio Theory suggests that for a given level of expected return, investors will always prefer the less risky allocation. In that case, as this chart shows, a 60/40 investor should consider Multi-Strategy hedge funds as part of their allocation.

Source: Bloomberg, Trium. Data from January 2000 to August 2024. Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU) / Multi Strategy Hedge Funds = Eurehakedge Multi-Strategy Hedge Fund Index.
 

And below since January 2021.

Source: Bloomberg, Trium. Data from January 2021 to August 2024. Equities = MSCI World TR / Bonds = Bloomberg US Treasury Total Return Unhedged USD Index (LUATTRUU) / Multi Strategy Hedge Funds = Eurehakedge Multi-Strategy Hedge Fund Index.
 

Unlike a passive 60/40 allocation, where the investor is unwilfully subjected to different correlation regimes and does not receive a diversification benefit when it is needed, active management of correlations is necessary to ensure diversification. This is made possible in a Multi-Strategy hedge fund because of real-time transparency. Multi-Strategy managers can view how individual underlying strategies perform in different market conditions and witness the real-time co-movements between capital sleeves, which act as helpful inputs into allocation decisions. In Coco Chanel’s words, Multi-Strategy hedge funds are different. 

RELATED INSIGHTS

  • Trium Talks

Gold: Mine over Metal?

Thomas Roderick

  • 6 min
  • Video

Can Factor Timing really give investors an edge in today’s markets?

Dan Jelicic

  • 22 min
  • Trium Talks

The markets dodged more than just a bullet

Toby Hayes

  • 9 min
  • Trium Talks

Tapping into the investment opportunity in water

Joe Mares, Tom Ayres

  • 5 min
VIEW ALL
SIGN UP TO TRIUM TALKS
Trium Talks triangle

CONTACT US

Please contact us to hear more about our solutions for investors and managers, as well as if you have any other enquiries.
CONTACT US

Investor Type

To access Trium Capital strategies, please select your investor type and territory from the below options:

Important legal information

Please indicate by clicking the box below, that you have read and agree to the following important information:

The content on www.trium-capital.com (the “Site”) is general information which is provided without any warranties of any kind, whether express or implied by any means whatsoever. While we have sought to ensure that the content contained on this Site is timely and accurate, we make no representation, warranty or statement of any kind with respect to the Site and the timeliness, accuracy or correctness of the content provided herein. We may change the content at any time without notice and, to the fullest extent permitted by law, will not be liable for errors or omissions in the content.

Any entry into a contract with any party mentioned on this Site or in respect of any product referred to on this Site shall be subject to the terms of that contract, and the information contained on this Site shall not constitute a representation, warranty or statement in respect of such contract to the fullest extent permitted by law.

By using this Site, you acknowledge that the Site contains copyrighted materials as well as trademarks and service marks that are owned by Trium Capital LLP, or its affiliates (“Trium”) or third parties. Nothing contained in this Site shall be construed as conferring any right to any copyright, trademark or other proprietary interest of Trium or any third party. You agree not to infringe upon any copyright, trademark, service mark or patent right, and to comply with all law and regulation in respect of any permitted use or viewing thereof. You also agree that you will not alter or remove any copyright, trademark or any other notice from any authorised copy of the content on this Site.

Certain links in this Site connect to websites maintained by third parties. We make no representations or warranties as to any content contained in these third party sites and take no responsibility for such sites. Our link to another site is not an endorsement of that site.

We are not responsible for providing you with, on behalf of anyone other than ourselves, information required under Article 13 or 14 of Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016, on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). We may provide you with access to other websites which contain information pursuant to such regulatory obligations on behalf of third parties, but we make no representation, warranty or statement as to the completeness, accuracy or truthfulness of such information.

In no event will Trium be liable for any damages, expenses or losses, including without limitation direct, indirect, consequential, special, incidental or punitive damages resulting from or caused by the use of this Site or the information herein (or any information on a linked website), the inability to use this Site or the information herein, any delay in operation or transmission or any communication line or system failure.

Your access to and use of this Site are subject to the terms and conditions contained herein. By accessing and using this Site, you accept these terms and conditions, without limitation or qualification. These terms and conditions may be supplemented, amended and/or rectified at any time by Trium.

This Site is operated and issued by Trium Capital LLP which is authorised and regulated by the Financial Conduct Authority (Register number 497640). You can gain access to the FCA’s rules and guidance notes from the following link: www.fca.org.uk.

Please visit the main website of Trium Capital LLP, www.trium-capital.com for full regulatory disclosures.

This website is issued by Trium Capital LLP, a limited liability partnership incorporated in England & Wales (Partnership number OC343790) which is authorised and regulated by the UK Financial Conduct Authority (FCA) (497640).

The information presented herein expresses the personal views of authors in the current economic environment and not necessarily those of Trium Capital LLP (“Trium”). This information is intended for informational purposes only and does not qualify as investment advice nor does it constitute an offer to sell or the solicitation of an offer to buy any securities or interest in any fund managed or operated by Trium or its affiliates.

Any articles on this site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statements or examples. Neither the author nor Trium or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein are only as of the date that they were made.

© 2024 Trium Capital. All Rights Reserved

NEWS

CONTACT

INVESTOR PORTAL