US stocks dominate global markets, accounting for over 60% of investable capitalization, with significant concentration among top performers. While global diversification is generally advised, recent data shows US investors may have fared better domestically due to exceptional stock performance and lower volatility. However, rising correlations among markets have diminished diversification benefits, highlighting the complexities of investment strategies.
Hedging short-term currency risk can inadvertently increase overall volatility of real returns, complicating diversification efforts. The concentration of US stocks, now over 60% of global market capitalization, poses challenges for investors, as does the risk of over-diversification, which can dilute potential returns. Effective diversification requires careful balance, as simply holding a large number of assets may not optimize performance.
The CLO market faces a mixed outlook amid macroeconomic challenges, with interest rate cuts potentially improving the financial stability of highly leveraged companies but also lowering yields for investors. Japanese investors remain active despite recent volatility, while liability management exercises are increasingly common as sponsors restructure debt. The rise of private credit is reshaping competitive dynamics, making it harder for CLO managers to secure quality syndicated loans, necessitating innovation in CLO structures.
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