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Downside Betas vs Downside Correlations

Quantifying the diversification benefits of alternative strategies

Nicolas Rabener
10 min read
24 Apr 2023

SUMMARY

  • Investors typically use correlation to identify diversifying strategies, but the metric can be misleading
  • Upside and downside betas and correlations provide a better perspective
  • Common hedge fund strategies failed to provide attractive diversification benefits

INTRODUCTION

Are investors as rational as portrayed in the finance literature?

For example, when Lehman Brothers collapsed in October 2008, investors dumped almost all assets, regardless of their nature. The mantra was to shoot first, and ask questions later. Was that rational behavior?

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