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1. Range of opportunities
When one market is trading flat, another is likely to be on the move. If a trader sticks to a single asset class, good opportunities can easily pass them by. With a multi-asset broker, traders have access to a wide range of investment products, enabling them to take advantage of rising, falling or even sideways trading markets. For example, you could hold a long-term stock position, but day-trade futures on the side to capture short-term market movements. Or you could write a covered call option on your stock holding as an additional income strategy in sideways markets.
2. Tactical asset allocation
Different securities tend to perform better at different stages of the business cycle. Investors will often try to reposition their portfolio to capture these cyclical performances, allocating capital to the specific asset classes, sectors, geographies or instruments that show the most potential for gains. This is known as tactical asset allocation, an active strategy that requires access to a wide range of financial instruments and, ideally, multiple asset classes. For instance, with a potential recession on the horizon, you may want to consider moving into safe-haven assets such as gold, government bonds or even currencies such as the Japanese Yen or Swiss Franc.
In the current economic climate, capital preservation has become just as important as capital returns. Hedging is an effective risk-management strategy that many experienced traders employ to offset short-term risks in their core investments. Say you hold a portfolio of large cap US stocks but are worried about an upcoming FOMC announcement. If you also have access to derivative products – such as futures and options – you could take a short position on a representative index such as the Dow Jones during the event period. This would of course reduce your potential upside, but equally hedge against the prospect of a significant loss.
Building a well-diversified portfolio is one of the key principles of investing. Traders reduce their overall risk by making sure their investments aren’t concentrated in one specific area. This makes it easier to ride out volatility swings and achieve stable returns. Most stock investors may diversify across sectors and geographies, but if you want a truly diversified portfolio, seeking out positions in multiple asset classes such as equities, bonds, commodities and forex could be more prudent.
5. Buying power
Multi-asset brokers typically offer their clients a margin account for leveraged trading of derivatives. Experienced traders prefer to trade with leverage because it is an efficient use of their capital. For example, if you want to trade oil, you can use a future contract requiring only a small percentage of the exposure as collateral in your margin account. Leveraged derivative trading enables traders to access markets that would otherwise be unavailable to them, and to take on position sizes that might otherwise be unaffordable to them. This amplifies their potential for profits – although it also increases their potential for losses.
The performance of multi-asset strategies
Historical performance is of course never a guarantee of future performance. However, by taking a look at Saxo’s client book, we can see that 56% of our 100 most profitable clients are trading across asset classes (profitability based on generated year-to-date nominal PnL, January 1st – September 30th 2019).
Analysis of multi-asset funds further highlights the positive performance of cross-asset strategies over longer periods of time. Based on data gathered by Morningstar, the ten best performing multi-asset funds (in the mixed 20-60% shares sector) generated an average total return of 156% over the past ten years. At the other end of the range, the ten worst performing multi-asset funds still yielded a steady average total return of 75% over the same period.
The No. 1 choice for multi-asset traders
As a pioneer in multi-asset trading, Saxo identified early on that having access to a full range of investment products would be a huge advantage – not only for retail traders, but for institutions such as banks and wealth managers, too.