The power of investments with low correlation

October 28, 20222 min read
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It’s hard to predict market performance over any period of time, but studying correlation between asset groups can help investors contextualize some observed patterns in market performance. Well diversified portfolios — consisting of investments that have low correlation with one another — often perform better in times of market downturns, and allow investors and managers to mitigate risk, potentially offsetting significant loss in times of widespread market volatility.

How is correlation defined?

In statistics, correlation measures the relationship between two entities. Two assets that move perfectly in tandem have a correlation of 1.0, while assets with a more independent relationship will be closer to 0. A negative correlation, more uncommon, means that the investment types move in opposite directions.

What does a portfolio with low correlation mean?

Choosing assets with low correlation can help to reduce the overall risk of a portfolio, while still generating returns. Historically, the most common way to ensure this type of diversification was to include stocks and bonds in a portfolio – giving rise to the popular 60/40 portfolio theory – as the two investments were thought to have a low degree of correlation with one another. 

But in recent times, we’ve seen an unusual correlation between U.S. equities and aggregate bonds — marking a paradigm shift in the pattern observed before.

As the efficacy of the 60/40 portfolio wanes, investors are now increasingly turning to other forms of investments to increase diversification and achieve low correlation. Commodities such as precious metals (i.e. gold) are common hedges to market volatility, but the field of alternatives is broadening to include other asset classes such as private credit, real estate, art, and private equity.

Spotlight: Yieldstreet Prism Fund

Yieldstreet’s multi-asset class fund has historically provided investors with a negative correlation to U.S. equities.

Past performance is not indicative of future results. 

Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Prism Fund before investing. The prospectus for the Yieldstreet Prism Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetprismfund.com. The prospectus should be read carefully before investing in the Fund.

Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

The securities described in the prospectus are not offered for sale in the states of Nebraska and South Dakota or to persons resident or located in such states. No subscription for the sale of Fund shares will be accepted from any person resident or located in Nebraska and South Dakota.