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Investors turn to diversification and hedging strategies as economic uncertainty looms

Table of Contents

  • RELATED POSTS
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With economic uncertainty becoming the new normal, multi-asset trading is a way for investors to hedge risks and heighten returns.

Increasing economic and geopolitical risk is fuelling the rise in multi-asset trading as a way for investors to hedge their risks and heighten returns in an increasingly volatile marketplace. Traditionally, investors have tended to trade one asset class a time however they are increasingly ‘hedging’ their positions across multiple asset classes, being nimbler and focusing not just on capital returns but capital preservation too. This is because a diversified portfolio reduces risk by not being concentrated in one specific area of investments, one of the most important principles in investing. A diversified portfolio allocates capital across different asset classes such as cash, fixed interest, property, domestic and international shares, as well as within asset classes, e.g. industry sectors, in order to reduce overall investment risk.

As a pioneer in multi-asset trading, we have noticed this trend first hand that traders increasingly trade across different asset classes and geographies because assets tend to rise and fall at different times, if investors have exposure to a range of assets. A fall in one will likely be balanced out by an increase in another, thereby helping to minimize losses and provide a more stable overall return, a key benefit of diversification and important component of managing risk and reaching financial goals. Therefore, maintaining a diversified portfolio is essential to any long-term strategy. It’s easy to see why investors are adopting this strategy when you look at today’s trading environment, which is continually being met by unprecedented challenges for even the savviest trader.

While the US economy is faring relatively well to date, there are worrying signs such as reduced spending on consumer durables as well as a divisive political landscape. Crossing the Atlantic, we see weakness across the Eurozone, with Germany, once an economic powerhouse, experiencing a major manufacturing slow down. And Germany is not alone. Developed economies such as France and Italy are beset with their own economic weakness. Then we have the uncertainty around Brexit to cause further market unease. This confluence of factors has created a scenario where traditional investing strategies no longer work. With returns lower and volatility higher, portfolio diversification will be the name of the game for the rest of 2019 and the foreseeable future. This is particularly important as we enter the summer period which tends to be characterised by high volatility.

Another reason why investors feel more comfortable venturing into multi-asset investing is the availability of analytics. On our platform, SaxoTraderGO for example, investors can review how their portfolio is performing both on aggregate and at instrument level across the different asset thresholds, enabling investors to monitor impact of potential trends and growth sectors such as electric vehicles, battery technologies, renewable energy and the like and then make investment decisions accordingly. The platform also provides easy access to multiple indexes, ETFs and mutual funds so even less experienced investors can easily diversify their portfolios.

While multi-asset trading won’t provide protection during a total market collapse, risk can never be completely eliminated, Diversification can mitigate asset-specific risk and volatility which will help cushion investors against many of the worst shocks, much more so than using a strategy that focusses on one asset, e.g. currencies, equities, property. It also allows investors to better identify and map a slowdown in particular sectors and then move to adjust the portfolio to a larger weighting in assets that might be performing better.

But multi-asset trading is not just about adjusting portfolios against risk. Many sophisticated institutional investors including pension funds, investment managers and banks are also seeing the benefit of multi-asset trading desks as a way to consolidate and reduce internal costs in addition to providing a more efficient way to comply with increasing regulations. This has come as a result of investors finding it easier to keep abreast of new regulation via one single trading platform, rather than monitoring trading across different platforms. In this respect, retail trading and investing has led the way.

Technology needs to play catch up

The growing demand for multi-asset trading however will force a rethink in how trading desks are organised. Instead of a set of specialists, trading and investment providers will need to create multi asset trading desks with experts on a wide variety of asset classes, from equities, to fixed income to derivatives to cryptocurrencies. This will pose considerable challenges to create front office systems that can enable cross-asset class functionality, and a re-examination of staff recruitment to include those with broader knowledge of multiple asset classes. Along with these changes will be the need to ensure continued transparency and disclosure, showing risk across portfolios for clients and other stakeholders.

With economic uncertainty becoming the new normal, multi-asset trading will provide both challenges and opportunities for firms who are prepared to invest in and adapt their internal trading systems in order to stay competitive and meet new client demands.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
– Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
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Eleanor Creagh
Australian Market Strategist
Saxo Bank

Topics: Thought Leadership
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