Imagine a world where your investments don't all sink or swim together.

Traditional portfolios often cling to stocks and bonds, creating an illusion of safety.

Yet, in turbulent times, these assets can plummet simultaneously, leaving you exposed.

This is where uncorrelated strategies and assets come into play.

They move independently from market swings, offering a lifeline when others falter.

By embracing this approach, you can build a resilient financial future.

Let's explore how to diversify beyond the norm and achieve real stability.

The Illusion of Diversification

Many investors believe they are diversified by holding various stocks and bonds.

However, these assets often share underlying risks, such as economic cycles.

During crises, they can become highly correlated, leading to significant losses.

This correlation illusion fails portfolios when it matters most.

True diversification requires assets that dance to their own tune.

Uncorrelated strategies provide this by detaching from common market factors.

They help smooth returns and protect wealth over the long term.

What Are Uncorrelated Strategies?

Uncorrelated strategies or assets have low or no correlation to traditional markets.

Correlation is measured from -1 to +1, with 0 indicating independence.

These strategies aim for scores no more than +/-0.20 over business cycles.

They derive returns from market-agnostic sources like relative-value trades.

This independence reduces portfolio volatility and enhances risk-adjusted returns.

Unlike some hedge funds, they avoid betas tied to public equities.

Instead, they focus on idiosyncratic events or unique income streams.

This structural difference makes them powerful tools for investors.

Key Examples of Uncorrelated Assets and Strategies

Incorporating uncorrelated elements into your portfolio requires knowing the options.

Here are some categories to consider for effective diversification.

• Hedge Fund Strategies: Equity market-neutral, statistical arbitrage, and trend-following.
• These rely on mathematical models or systematic approaches to generate gains.
• They often involve short-term trading or volatility arbitrage techniques.

• Alternative Alternatives: Litigation funding, drug trial financing, and life settlements.
• These are event-dependent, with returns tied to specific legal or medical outcomes.
• They avoid traditional market cycles, offering unique growth opportunities.

• Non-Traditional Assets: Art, collectibles, commodities like gold, and private real estate.
• These provide tangible value and can hedge against inflation effectively.
• Focus on items with consistent valuation or contractual returns for reliability.

• Other Diversifiers: Venture capital, especially subsets with low public market ties.
• For example, UK venture capital shows only a 7% correlation to equities.
• Fama-French factors in market-neutral setups also add independence.

Each category offers distinct advantages based on your risk tolerance.

Selecting the right mix can transform your investment approach.

A Snapshot of Uncorrelated Categories

This table summarizes the diversity available in uncorrelated investments.

Use it as a guide to identify potential additions to your portfolio.

Benefits of Embracing Uncorrelated Investments

Adding uncorrelated strategies can profoundly impact your financial health.

They offer several advantages that go beyond simple asset allocation.

• Diversification: Low cross-correlations reduce common factor risk effectively.
• For instance, managed futures performed well during the 2022 market downturn.
• This offsets losses when traditional assets like equities decline sharply.

• Risk Reduction: Lowers overall portfolio volatility through independent movements.
• Research shows that optimal allocations can maintain or even reduce risk.
• This leads to smoother returns and better long-term performance.

• Absolute Returns: Generates gains independent of market direction.
• These strategies are ideal for strategic, not tactical, allocations in portfolios.
• They provide a steady stream of income or growth regardless of cycles.

• Tax and Structural Advantages: Market-neutral setups separate alpha from beta.
• This benefits taxable investors by optimizing after-tax returns efficiently.
• Long-short approaches often outperform long-only active strategies.

By leveraging these benefits, you can build a more robust investment plan.

This approach counters the correlated diversification illusions common today.

Current Market Context and Why Now Matters

Today's financial landscape is marked by increased uncertainty and volatility.

Monetary policy shifts and rising interest rates create challenging environments.

This context favors uncorrelated approaches over traditional beta-exposed strategies.

As extraordinary monetary support recedes, their value becomes more apparent.

Uncorrelated assets shine during periods of market normalization and dispersion.

They are not for timing markets but for strategic, long-term allocation.

Investing now can help navigate business cycle links in most assets.

This timing enhances the appeal of seeking yield through independence.

How to Invest in Uncorrelated Strategies

Accessing uncorrelated investments requires careful planning and selection.

Here are practical ways to incorporate them into your portfolio.

• Funds and Vehicles: Consider options like the Neuberger Berman Uncorrelated Strategies Fund.
• This UCITS fund offers liquidity and transparency with a seasoned team.
• It uses managed accounts for control and has performance-based fees.

• Access Methods: Explore commingled funds, separately managed accounts, or bespoke ventures.
• Evergreen private debt vehicles are suitable for illiquid assets.
• Diversify across managers and sectors to mitigate specific risks.

• Portfolio Construction: Blend uncorrelated assets with ETFs or mutual funds for broad exposure.
• Focus on best-in-class opportunities due to scale limitations in some strategies.
• Use correlation evaluation tools to optimize allocations strategically.

Start small and gradually increase exposure as you gain confidence.

Consult with financial advisors to align with your risk tolerance and goals.

Risks and Considerations

While promising, uncorrelated strategies come with their own set of challenges.

Being aware of these can help you invest more wisely.

• Idiosyncratic and Illiquid Nature: Some assets require diversification to manage risks.
• For example, value factors can face prolonged drawdowns in certain markets.
• Ensure you have a long-term horizon and adequate liquidity buffers.

• Not a Separate Asset Class: Uncorrelated strategies are structurally similar to others.
• They have unique drivers but should be integrated thoughtfully into portfolios.
• Avoid over-reliance on any single strategy to maintain balance.

• Verification of True Low Correlation: Not all alternatives qualify as uncorrelated.
• For instance, long-short equity often has a beta around 0.50 to markets.
• Always check historical data and avoid high-fee options without clear benefits.

By addressing these risks, you can enhance your investment resilience.

This proactive approach ensures sustainable portfolio growth over time.

Practical Steps for Portfolio Integration

Implementing uncorrelated strategies requires a methodical approach.

Follow these steps to seamlessly integrate them into your financial plan.

• Assess Your Current Portfolio: Evaluate correlations among existing assets using tools or advisors.
• Identify gaps where uncorrelated strategies could reduce overall volatility.
• This assessment forms the foundation for effective diversification.

• Research and Select Strategies: Focus on categories aligned with your goals and risk profile.
• Prioritize assets with proven low correlation, such as managed futures or royalties.
• Use resources like the provided table to guide your selections.

• Start with Allocations: Begin with small percentages, such as 5-10% of your portfolio.
• Gradually increase exposure as you monitor performance and comfort levels.
• Rebalance periodically to maintain desired risk and return characteristics.

• Monitor and Adjust: Regularly review correlations and performance metrics.
• Stay informed about market changes that might affect uncorrelated assets.
• Adjust allocations based on new insights or evolving financial objectives.

By taking these steps, you can harness the power of uncorrelated investments.

This journey toward true diversification beyond norms can secure your financial future.

Embrace the uncorrelated universe to build a portfolio that stands strong in any storm.