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The New Diversification: Open Your Eyes to Alternatives

Christopher Geczy
The Journal of Private Equity Winter 2016, 20 (1) 72-81; DOI: https://doi.org/10.3905/jpe.2016.20.1.072
Christopher Geczy
is academic director of the Jacobs Levy Equity Management Center for Quantitative Financial Research and academic director of the Wharton Wealth Management Initiative at the University of Pennsylvania in Philadelphia, PA.
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  • For correspondence: geczy@wharton.upenn.edu
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Abstract

During the 2008 financial crisis, many portfolios considered widely diversified failed to fulfill their expected function of protecting against large drawdowns. Historically, correlations among various types of stocks and bonds have usually increased during financial shocks, but the diversification shortcomings of standard portfolio allocations still surprised investors. Six years later, managers have a more sophisticated understanding of portfolio drawdown risk and how to mitigate it through diversification. In this article, the author advocates a focus on the risk exposures within a portfolio and inclusion of risk diversifiers—often sourced through so-called alternatives—to design portfolios more resistant to volatility spikes and major shocks.

TOPICS: Private equity, portfolio construction, financial crises and financial market history, risk management

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The Journal of Private Equity: 20 (1)
The Journal of Private Equity
Vol. 20, Issue 1
Winter 2016
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The New Diversification: Open Your Eyes to Alternatives
Christopher Geczy
The Journal of Private Equity Nov 2016, 20 (1) 72-81; DOI: 10.3905/jpe.2016.20.1.072

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The New Diversification: Open Your Eyes to Alternatives
Christopher Geczy
The Journal of Private Equity Nov 2016, 20 (1) 72-81; DOI: 10.3905/jpe.2016.20.1.072
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  • Article
    • Abstract
    • FALLING KNIVES LOVE COMPANY
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    • INVESTMENT ALTERNATIVES ARE NOT AN ASSET CLASS OR A STRATEGY, PER SE
    • ALTERNATIVES ARE MORE THAN FIXED-INCOME SUBSTITUTES
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    • TEN PERCENT ALLOCATION TO ALTS? MAYBE, BUT PROBABLY NOT ENOUGH
    • THE BENEFITS OF AVOIDING BIG DRAWDOWNS
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