Preface
‘Risk is inherent in every investment’
The financial crisis that began in the summer of 2007 would suggest that under stressed market conditions supposedly ‘noncorrelating’ asset classes, such as commodities back then, tended to ‘converge’. Why was this?
In a de-leveraging environment, owing to their above-average liquidity, commodity positions were among the first to be unwound. Their rapid fire ‘sell-off’ inadvertently triggered the convergence of multiple risk factors, causing their ‘normally noncorrelating’ behaviour to revert. Ironically, such phenomena occur precisely when supposedly ‘noncorrelating’ asset classes are meant to deliver. Not only have they tended not to, but the occurrence of such a convergence is becoming more frequent.
The collapse of Lehman Brothers that ensued in the fall of 2008 hastened the credit crisis and only served to reinforce that when liquidity requirements need to be fulfilled money will be withdrawn, firstly, from where it easily can be (the automatic teller machine effect) and then, even if it bears a cost, from wherever it is. As has been witnessed, such forced withdrawals exerted a downward pressure on and across a spectrum of asset classes, leading to further withdrawals, which, in turn, intensified a negative asset price spiral and contributed to the most severe crisis since the Great Depression.
Irrespective of when the next financial crisis occurs there is a need to be cognisant of the changing investment landscape and the repercussions ...
