Specific Recommendations:
Analyze all asset classes on a global basis. There are enough quoted market indices that major asset classes can be tracked and compared on a global basis. This allows the accurate comparison of performance between investments valued in different currencies and would automatically tend to reduce our exposure to US dollar denominated markets at inappropriate times.
Eliminate the "international" asset class. In an increasingly global economy with transnational corporations, the existence of an "international" asset class is quickly becoming an illusion. Analysis of investments on a global basis also makes this class unnecessary.
Eliminate the "alternative investments" asset class. Because of increases in exchange-traded market opportunities and other global changes, the theoretically enhanced performance of “alternative investments” can be achieved with more liquidity and less risk using specialized managers within other asset classes. The nature of the investments usually contained within this class is also sufficiently broad to make the definition and risk assessment questionable and correlations with other classes uncertain.
Introduce opportunities for perfect negative correlation within each class by using the absolute value of the percentages in the asset allocation targets. If the asset allocation requires 10% exposure to an asset class or subclass, strategists would charge investment managers with moving toward either a +10% or -10% exposure to that asset class using whatever financial instruments might be necessary. There is enough global liquidity in appropriate instruments for managers to implement this strategy for most asset classes.
Add "foreign exchange" as a risk adjustment tool and perhaps an asset class. At $3 trillion per day, the electronic foreign exchange market trades roughly 10 times the value of all the stock exchanges in the world combined. Transaction costs are small compared to other investments and the markets are completely transparent. As a risk adjustment tool, the foreign exchange market represents a pool of liquidity that will allow our strategists to quickly lay off risk from other parts of the portfolio. It can be used to assist managers working in the other asset classes in implementing the "absolute value" policy (immediately above). As an asset class foreign-exchange offers long trends and the liquidity for managers to move between long and short positions safely without deforming the market. While liquidity is somewhat limited by using FX futures rather than FX cash, risk is reduced by exchange guarantees on the contracts.
