What are uncorrelated return streams?

Uncorrelated return streams refer to investments or strategies that generate returns independent of each other or the broader market. Key characteristics of such returns include:

• Asset Class and Behavior: The underlying asset classes or factors that define these investments are vastly different, leading to uncorrelated behavior. There is typically little to no correlation between the behavior of these asset classes and the general market trends 1.

• Investing without Leverage: In some investment strategies that produce uncorrelated returns, leverage is not used, which means the returns are a result of genuine asset performance rather than amplified bets 1.

• Different Market Responses: In highly correlated markets, most assets will react similarly to economic events. However, uncorrelated assets will behave differently, sometimes even contrary to general market movements. During market stresses, while most correlations tend to converge, genuinely uncorrelated assets maintain their independence 1.

• Potential for Negative Returns: It is important to note that being uncorrelated does not necessarily guarantee positive returns. Uncorrelated return streams can also produce negative outcomes during certain periods, which underscores the importance of thorough understanding and careful integration into portfolios 2.

These characteristics make uncorrelated return streams especially valuable for diversification, as they offer potential for portfolio stability and reduced risk during turbulent market conditions.