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COVID’s Impact On Global Markets, Lessons For Asset Managers

Charles Paikert, New York, April 29, 2021


There was little that asset managers could have done to hedge risk exposure to a shock such as the COVID-19 pandemic, it has been argued. What lessons can be learned by the wealth management community?

COVID-19 dramatically affected markets and proved to be a shock to systematic risk, according to Toby Moskowitz, professor of finance at the Yale School of Management.

The pandemic had a “clear [negative] affect” on equities and asset allocation, according to Moskowitz, who spoke at the Investments & Wealth Institute’s ACE Academy conference.

When COVID first struck last year, it quickly altered the correlation structure of major asset classes, said Moskowitz, who is also a research associate at the National Bureau of Economic Research and a principal at AQR Capital Management.

Over the next several weeks, “there was no place to hide from COVID,” he explained. “The market understood what would happen and anticipated that it wasn’t going to stop. Every asset class was exposed to the COVID factor.”

After analyzing high frequency data and global asset returns, and tracking global news about the pandemic, Moskowitz and his team found “the biggest change in correlation structure in the past decades.” 

In addition to “massive allocation shifts,” volatility also spiked dramatically, the research confirmed. 

How should asset managers react in a crisis?
So what could asset managers have done? Could they have hedged their risk exposure to the crisis?

In a word - No.

“There was nothing you could do about it,” Moskowitz said. “If you tried to predict it, you would just make things worse. It was the very definition of a crisis - there was nowhere to run and hide and no way to hedge it away.”

COVID was indeed a big crisis, which Moskowitz defined as a common risk that is unavoidable. But what markets experienced during the past year’s pandemic holds true for all major crises, Moskowitz asserted.

“COVID was a microcosm of how asset allocation behaves during a crisis,” he said. “There will be a next one, we just don’t know what it will look like. But we can learn a lot from this one.”

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