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Funds are always looking to diversify in order to increase their returns while mitigating their risk. The problem is that in today's interconnected economy wher
by wefarrell 6y ago
Funds are always looking to diversify in order to increase their returns while mitigating their risk. The problem is that in today's interconnected economy where funds are extremely diversified, shocks cascade and unrelated sectors wind up taking a hit.
Japan's stock market is unique, because their central banks own a large portion of their ETFs, which insulates them from these global shocks:
https://www.businesslive.co.za/bd/world/2019-09-04-storied-investor-michael-burry-has-this-to-say-about-markets/ https://www.businesslive.co.za/bd/world/2019-09-04-storied-i...
- rmrfstar 6y agoDo you mean that financial shocks propagate because a leveraged investor may have to sell assets in market A to fund margin calls in the primary impacted market B, or that economic shocks propagate because supply chains are deep and brittle?
- smallnamespace 6y agoBoth happened in 2008
- wefarrell 6y agoFinancial shocks driven by passive index funds that hold pre-defined percentages of different asset types. Let's say you have a diversified passive fund that holds 25% each of asset types A, B, C and D. If asset type A crashes and it's now 10% then B, C, and D will now be 30%. The fund will rebalance and sell B/C/D so they're back to 25% and the values of those asset types will decline. The values of A/B/C/D all correlate with one another even if they are fundamentally unrelated.
- centimeter 6y agoMost passive funds are cap weighted so this is not an issue.