The growing complexity of fixed income and currency markets suggests that investment professionals should employ as broad an array of investment instruments and strategies as possible in order to maximize the efficiency of their portfolios. One of the main reasons behind this is diversification. We believe that a diversified set of investment strategies helps to ensure that no one instrument – or segment of the market – is dominant within the portfolio, allowing for potential excess returns across a number of strategies. When diversifying their portfolios, managers should also consider correlation levels within the opportunity set. The lower the correlations of excess returns, the greater the diversification benefits. In turn, this should result in a higher information ratio for the overall portfolio.
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