The Hidden Bond Exposure In Equity Portfolios

One of the lessons from the financial crisis is the importance of checking your portfolio’s exposure to different risk premia instead of just assuming that asset classes are uncorrelated: correlations not only exist, they have a way of getting stronger exactly when you hope they wouldn’t. With that in mind, long-only equity investors might have trouble identifying the source of recent market volatility, but according to risk management firm AlphaBetaWorks it’s their hidden exposure to the bond market that is shaking things up.

“An equity portfolio with no bond positions is still exposed to the bond market,” AlphaBetaWorks writes on its blog. “Over the past five years 20% of US equity market volatility can be explained by a...