1. Scott Stewart Portfolio Manager April 2016 Concentration, Correlation, Fragility, Volatility

2. Concentration

3. Positioning is extreme

4. Positioning is extreme – crowdedness of style

5. Fragility – the impact of herding

6. Markets are becoming more systematic

7. This leads to behavioural change

8. And some of the behaviours are very odd

9. Source: BarclayHedge Alternative Investment Database Systematic strategies are more prevalent

10. Which has led to valuation divergence

11. This can change the character of your investment

12. Increasing its risk

13. Liquidity & Vulnerability

14. Liquidity – depth, volume and volatility

15. Vulnerability – negative feedback loop

16. Volatility and Risk Management

17. Volatility – is it going away?

18. Source: “Third Generation Asset Allocation”, Brad Jones, Deutsche Bank, 2011 Diversification – 60/40 won’t help you

19. Source: “Third Generation Asset Allocation”, Brad Jones, Deutsche Bank, 2011. Data since 1984 or earliest available Dollar weight is not risk weight

20. What if I diversify into other asset classes?

21. Source: Artemis Capital Correlation varies through time

22. Volatility management should be part of a resilient portfolio Uncorrelated investment is fine but correlation is time-varying Systematic strategies can contribute to crowding/herding This can result in valuation extremes This is occurring when the market displays liquidity and structural issues The goal should be resilient portfolios as opposed to optimal portfolios The next generation should blur the line between asset allocation and risk management Good risk management should look for more certain negative correlation

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