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Misinformation on Investment Diversification

Last update on: Feb 25 2020

Most investors believe they are diversified. They are told to diversify by the financial services industry. I’ve argued for many years that the traditional diversification peddled by the financial services industry isn’t real diversification, putting investors at more risk than they believe they are taking. From time to time Wall Street admits that people really aren’t as diversified as they need to be. But it does so in order to peddle a new product to them.

Here’s a post explaining how this work, and still doesn’t help investors, with a focus on managed futures investments. It’s not a good story for investors. If you want true diversification that works over time, try my “hedge fund” portfolio of mutual funds.

At one level this is a familiar story about excessive fees. For decades the overall regulatory push has been to cut out commissions, fees, and recurring charges built into investment products.

But don’t mistake the fees for a bug. They are all too often a feature of business models. For instance, alternative asset management firms such as KKR and Blackstone have lent their brands to loan funds offering humdrum products at high prices.

For 63 managed futures funds assessed by Bloomberg, it turns out that all the profits came from parking investors’ capital in safe T-Bills. Only around 15 per of the capital was actually used to make bets buying and selling futures contracts, without success.



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