22 October 2015

Multi-asset trading: What is multi-asset trading?

Learn the basics of multi-asset portfolio management.

What is Multi-Asset Trading?
A multi-asset class investment would contain more than one asset class, creating a group or portfolio of assets – the most popular being cash equities (stocks), fixed income (bonds) and cash equivalents (money market instruments).  It is the opposite of putting all your eggs in one basket - but beware that definitions to multi-asset trading vary widely.

Why would traders consider a Multi-Asset approach?
Trading a combination of asset classes in a multi-asset strategy may be successful because it:

- Diversifies risk: 
Mixing uncorrelated asset classes in a multi-asset portfolio means that when one asset class underperforms, another asset class in the portfolio outperforms, minimizing performance loss and protecting the portfolio from unexpected market shocks  

- Drives performance: 
According to Professor William F. Sharpe, the American portfolio theorist and Nobel Prize winner who developed the Sharpe Ratio, performance from individual stock selection (buying shares in individual companies) accounts for just 9% of performance. Asset allocation – the specific mix of different asset classes and weightings to investments within each asset class – accounts for 91% of performance.

​Image Source: iStock


Which assets to include?

A diversified, multi-asset portfolio can draw from as many asset classes as your trading platform permits, from cash equities, bonds and commodities to derivatives (futures and options), foreign exchange (FX) and money market instruments.

There are many types of assets that an investor can choose to include in an asset allocation strategy, which include: Commodities (e.g. precious metals like gold and platinum as well as energy); Commercial and residential real estate (including Real Estate Investment Trusts (REITs)); Cash; Derivatives (futures and options); Contracts for Difference (CFDs); Investment Trusts; and, FX (both spot and options). 

How much of a trader’s portfolio is invested in each asset class – or the ‘weighting’ given to each asset class or strategy within asset classes – varies depending on the individual investor’s risk appetite, investment objective and timeframe, investment style and strategy. 
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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.