Stock options are the last source of true diversification, investors were told at the Absolute Returns Conference in Sydney.

In a presentation that received close scrutiny and engagement from delegates, Anthony Limbrick, portfolio manager for 36 South, told how growing consensus on diversification was having diminishing returns, in part due to the growing popularity of the approach.

“Pan asset allocation is starting to be less effective due to mean reversion,” he said, adding that low correlation “suckers” investors into diversification in benign environments.

The miscalculation of long-term prices for options, he said, represented the last true source of diversification. However, the price miscalculations, he predicted would eventually disappear for the same reasons that more conventional diversification was starting to prove less effective.

The 36 South strategy aims to have its highest weighting in stock options at the point at which markets are most likely to crash by beyond 10 per cent.

Its Kohinoor fund achieved a 73 per cent return after stock markets collapsed in 2008.

Investors on the panel discussion that followed, wrestled with the key objection to investing in such volatility, that of accepting losses in the years when volatility was low.

Bobby Pometkov, senior portfolio manager at Commonwealth Superannuation Corporation, said the losses, even though small, made it difficult to sell to trustees, adding that individual volatility strategies did not cover every type of market downturn

Travis Schoenleber, managing director of Cambridge Associates, agreed such strategies were difficult to invest in appropriately, were not cheap and were probably best controlled by those who had been given scope for delegated investment authority.

Limbrick was also questioned why investors did not run their own option strategies in-house.

He replied that while it was easy to buy options, it was hard to get out and that many less experienced traders either got out too early or too late.

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