Not a Correlation of 1, But Certainly Strongly Positive

We recently produced a post on the investment into Bitcoin and Ethereum by a large public pension system. One of the points stressed by this plan’s CIO was the fact that “this is another tool to manage my risk,” that “has a positive expected return… and a low correlation to every other asset class.” Having observed the pattern of performance during the last couple of years, it doesn’t appear to me that Bitcoin has a low correlation to equities. In fact, the Bloomberg chart below that was published by the Daily Shot appears to highlight a meaningful correlation to US equities.

Given current valuations for the US equity market… is Bitcoin or any other cryptocurrency truly a hedge against a significant market decline? As we discussed in the previous post published on October 29th, Bitcoin has only been around for about 11 years. It is much too short of a timeframe to make any real determination as to whether or not it will be a good hedge against inflation and/or a risk diversifying “investment” during periods of market dislocation when everything seems to correlate towards 1 with the exception of long-term US Treasuries, which have exhibited true diversifying tendencies.

If you want an appropriate investment that will protect your plan during significant down markets, convert your fixed-income core portfolio to a defeased bond portfolio that matches bond cashflows versus plan benefits and expenses (i.e. liability cash flows). Whether interest rates rise or fall, the value of your bonds will move in lockstep with the plan’s liabilities. This will provide the plan with the necessary liquidity to meet all of your short-term needs while extending the investing horizon for your growth (alpha) assets to rebound from the negative impact of any market correction. This is a tried and true investment approach used for many, many decades. Who needs another new-fangled product that might not produce the desired outcome?

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