RT Journal Article SR Electronic T1 Diversification Benefits from Leveraged Loans? Trends in Cross-Asset Correlations JF The Journal of Structured Finance FD Institutional Investor Journals SP jsf.2020.1.118 DO 10.3905/jsf.2020.1.118 A1 Dirk Dreyer A1 Ilja Schaab YR 2021 UL https://pm-research.com/content/early/2021/02/24/jsf.2020.1.118.abstract AB The concept of diversification is well understood by both academics and investment professionals. In forming a mean-variance efficient portfolio, investment managers look for low-correlated assets in order to maximize diversification benefits. This article investigates the potential of European and US leveraged loans to serve as diversifiers in a multi-asset portfolio. By calculating correlations between leveraged loans and other asset classes over the sample period from 2002 to 2020, the authors are not only able to demonstrate increasing correlations in highly volatile markets (i.e., financial crises), but also long-term, crisis-independent positive trends in asset correlations. In particular, leveraged loans and their correlations with stocks and high-yield bonds present significantly positive long-term trends and hence diminishing diversification benefits. The authors state that instead of short-term market volatility, increasing market integration could be the driving force behind this effect. The results also indicate that diversification benefits from leveraged loans are lower in the US than in the European market.TOPICS: Fixed income and structured finance, developed markets, portfolio construction, performance measurementKey Findings▪ The empirical analysis shows generally stable and low correlations of leveraged loans with most asset classes in European and US markets. Stocks and high-yield bonds are an exception, showing a pattern with rising long-term correlation coefficients.▪ The correlation of leveraged loans with high-yield bonds is higher than those with other asset classes due to their comparable characteristics. Correlations between those asset classes have risen, especially since the global financial crisis in 2008.▪ Due to higher market volumes and integration advantages in the US, the correlations of leveraged loans with other assets are higher in the US market, leading to lower diversification benefits compared to Europe.