Investment Wisdom Podcast – Day 2 of 12

What True Diversification Really Is and How to Maximize it

Adam Butler, CFA, CAIA
Adam Butler is Chief Investment Officer of ReSolve Asset Management, sub-advisor to an alternative allocation strategy at Rational Funds. He manages ETF and futures based strategies including a global risk parity ETF, two Adaptive Asset Allocation funds, and a multi-strategy hedge fund. Adam is also author of the book Adaptive Asset Allocation: Dynamic Global Portfolios to Profit in Good Times and is ranked in the top 1% of authors by paper downloads on SSRN. He has authored over a dozen papers and dozens of articles on asset allocation; factor investing; quantitative methods; and portfolio optimization. Adam holds both CFA and CAIA charters and appears on BNN Bloomberg and CNBC.

In episode one we described an investment arena that is likely to provide the best long-term opportunities. On this second day, we lay out the case for giving as much (or more) credence to portfolio diversification opportunities as is given to a strategy’s investment edge.

We believe investors should always seek the highest compensation for the risks they are willing to incur. In other words, their objective should be, as much as possible, to get the most bang (return) for their buck (risk). It can be useful to think of this risk-adjust return (or Sharpe Ratio) as a function of (1) an investor’s skill in generating consistent returns and (2) the amount of true diversification available in the investment universe at their disposal. We believe this second point is the most widely-overlooked aspect of portfolio construction, and we seek to remedy this today.

Podcast series re-posted with permission from Resolve Asset Management.  Click here to see the original post.