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November 6, 2008

Building Slack into the Financial System: No Automatic Rebalancing

I've been calling for some time for investors & regulators to embrace the idea of building slack back into the financial system. It is too tightly-coupled, with too many actions being triggered by unrelated problems, thus creating rippling consequences all over, and driving correlations to 1.0. With that in mind, at first glace I like what CalSTRS is doing here:

CalSTRS is thinking of altering its asset allocation caps, which sit at 40% for U.S. equities, 20% each for non-U.S. equities and fixed income, 11% for property and 9% for private equity.

The current situation allows a 3% deviation above or below caps, but the proposals would give it a 6% buffer in either direction. The system said that “with the market volatility and lack of liquidity, it is not prudent to be forced into automatic rebalancing.”

[via Money Management Letter]

A good first try.

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