Capturing Crisis Alpha – Most Investors Are Not As Diversified As They Think They Are

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During his recent interview with Tobias, Chris Cole explains how to capture crisis alpha and why most investors are not as diversified as they think they are, saying:

I have a different philosophy on the world than what is taught in most mainstream finance books which are taught in business school. For example, that you want a nice diversified portfolio and that diversification is going to provide benefits to you over time.

I think that was really proven to be false in the 2008 recession when everything went down together. The problem at the end of the day is that most people think they have this diversified portfolio of different asset classes but really in a crisis they find out that their diversified portfolio is just 98 percent levered to long GDP.

The way I like to phrase this is that there’s really only two asset classes. There’s the short volatility and there’s long volatility. Most people’s portfolio requires stability, requires some sort of expectation of mean reversion to make money. And it’s long the overall growth in the economy and the expectation that growth continues.

When you end up seeing some sort of deviation from the recent past, that could be either a massive deflationary environment or a massive inflationary environment, most people’s portfolio is ill-equipped to handle that. And that’s the long volatility asset classes.

Most people, 98% of what they have in there portfolio is only exposed to long GDP. Only exposed to stability is only short volatility.

What we seek is that crisis alpha component. Is the benefiting from change. Benefiting from sort of regime change. That regime change could be something as extreme as a depression or it could be something as extreme as a kind of extreme inflationary, markets go up a hundred or two hundred percent, and inflation is up as well. Kind of what was experienced in Germany in the 1920’s. Both are examples of extreme left and right wing change. We want positive exposure to that, and that’s what I would define as crisis alpha.


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