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Correlations Climb in Wake of Crisis

Portfolio diversification has become more challenging during the past five years, as our matrixes show.

Among the many legacies that remain from the financial crisis of 2008, one has perhaps received less attention than it is due: rising correlations. As many investors learned the hard way, even well-diversified portfolios can suffer painful losses during times of market chaos.

Large-cap stocks, small-cap stocks, and foreign stocks all got hammered. And even though the equity markets have more than recovered the inflicted losses, many investors still haven't gotten over the sting. As evidence, consider the rapid growth of alternative funds--currently the fastest-growing fund type with $34.6 billion added in just the past year. Using strategies similar to those of hedge funds, alternative funds appeal to investors who seek diversification at a time when correlations have increased among more traditional investment types. (Whether such funds deliver diversification is another matter.)

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