Chris Haroun explains how to diversify a portfolio across sectors, asset classes, geographies, and currencies. He recommends limiting any single sector to 10% of your portfolio and splitting equally among stocks, bonds, commodities, and alternatives. He also covers beta-adjusted risk and how Citadel used 86 statistical factors to balance their portfolio.
So when it comes to exposure and portfolio management, and we cover this in a lot of detail in my MBA program, you've got to look at a couple things. Number one, you got to look at sector exposure. And the way I'm going to answer, this is a great way for all of us to manage our personal money. So if you have $100 to invest, I want you to make sure you don't have more than, say, 10% of your money in a particular sector, like the tech sector or the retail sector, finance sector, etc. Banks. Okay? So that's one way to do it. You can look at sector exposure. Another way to do it is to look at asset class exposure. You know, have a nice mix of 25% stocks, 25% bonds, 25% commodities, and 25% other investments. Maybe your own house, for example, or you can buy REITs, real estate, investment trust REITs. Another way to look at it is you also look at geographic exposure as well to diversify your risk. And so don't make sure you don't have too much exposure to one country. You want to be diversified globally. Also make sure you don't have too much exposure to a specific currency as well. Now, in terms of portfolio management, from a hedge fund perspective, if you're interested in longs and shorts, whatever you advertise to your investors, and make sure your lawyer takes care of this in the documentation, please place in the investment offer, whatever you advertise, you have to stick to that. So if you tell your investors, I'm not going to ever have more than 10% long exposure, then what you have to do is analyze that as well so that you have no more than $10 long the market relative to your shorts. You also want to look at beta adjusted risk. And so beta, we know, measures the volatility of a given stock. The S&P 500 beta is 1. If a stock has a beta of 2, it's twice as volatile as the S and P. So it goes up twice as much as the S and P and down a bunch more than the S and P if the market goes down. So you got to make sure you calculate not just your net exposure, but also your beta exposure. And if you want to take it to the next level, last thing I'll say about this is when I worked at a big hedge fund called Citadel, what we did was we had a lot of other variables, statistical variables, and we licensed it from a company called Bara B A R R A. We had 86 independent variables that we would look at to manage our portfolio to make sure that we weren't too much beta long, net long, or momentum long either. Yeah.
