In this video, Envestnet PMC’s Michael Featherman discusses the shortcomings of the Modern Portfolio Theory (MPT) approach to asset allocation. During times of market stress, MPT’s traditional asset classes have experienced increased correlation, approaching 1.0, which is why alternative investments are needed.
ETFs, the internet, and algorithmic trading have created “herd behavior” according to Mr. Featherman, and this has undermined the effectiveness of MPT correlations. Following the financial crisis of 2007 and 2008, liquid alternatives began to catch on, not only with individual investors but also with endowments and pension funds. Mr. Featherman says he was influenced by the “innovative work” of David Swanson, chief investment officer of Yale University’s endowment assets, who pioneered “post-MPT asset allocation” with major consideration given to alternative asset classes.