Today, the Fed has engineered a situation in which the really unattractive asset classes are the ones we have always thought of as low risk: government bonds and cash. And unlike the internet and housing bubbles, this time it isn’t a quasi-inadvertent side effect of Fed policies, but a basic aim of them.

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Our goal is to grow your wealth with the most robust and stable diversification possible. Risk limits, stress testing and so on may be very useful tools, but can’t overcome fundamentally flawed portfolio construction any more than a seatbelt can solve the problems inherent in reckless driving.

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Overall, we’re cautiously optimistic about the recovery domestically, with an eye toward the various external macro forces that could disrupt it. As you know, we believe true diversification is a proactive process that requires looking under the surface of stated asset class objectives to identify underlying performance drivers and risks that could pervade multiple asset classes.

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In financial markets, equilibrium is a constantly moving target; the textbook “steady state” or “balance” doesn’t exist in an open and global economy. Some external shock is introduced and markets adjust to find the new balance between supply and demand for different assets.

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The renewed strength that the US economy began to show late last year has translated into a number of opportunities in credit and equities domestically. On the credit side, our managers are tilting away from richer high yield and treasury bonds in favor of mortgage-backed securities and high quality corporate bonds.

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It is not enough to take a narrow look at “Greece” or “Europe” exposure without exploring the various risk factors and knock-on effects associated with it – it’s impact on liquidity, volatility, growth and so on. One of the more likely secondary effects the European crisis will be on certain emerging markets investments.

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At Rain, we decompose strategies by risk factors. We deliberately select strategies on the defensive end of portfolios that are diversified by those risk factors. We use tools on the bond side that allow for far greater flexibility to manage exposure to interest rate and credit spread risk as well as non-fixed-income-centric strategies whose returns are largely independent of interest rate risk and safe-haven volatility. This allows us to build more dependable and truly diversified qualities into the defensive side of client portfolios.

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