Wednesday, May 30, 2012

Weird’s Deep Thoughts (Wednesday Noon Edition) Investors May Be Stoking the Volatility They Fear


Long-term investors fearful of another global financial storm may be better prepared than they were before Lehman Brothers went bust in 2008, but their increasingly nervous disposition could itself be making markets more fragile, Reuters writes.

The Lehman collapse and hyper-correlated decline in risky assets everywhere challenged a key long-standing investment tenet that broad diversification of portfolios was sufficient to protect overall savings over time.  In the dark six-month period after September 2008, there were few if any havens from a synchronized slump in equity, commodities, emerging markets, high-yield debt, hedge funds and the like.  Cash, top-rated government bonds and more esoteric "tail risk" hedges such as volatility indices were the only places to hide.

And for many long-term players, pension funds and insurers with 20- or 30-year horizons, that shock may still amount to just a short-term hiatus that fundamentals will correct over time.  But less than four years later, the still-smoldering banking crisis now threatens….

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