Risk Management

Correlation Risk: Why Diversification May Be Illusory

Holding multiple correlated positions does not reduce risk — it multiplies it.

Key rules

1. Sector or thematic positions compound — not diversify — risk
2. Calculate total exposure per sector or theme, not just per instrument
3. In risk-off events, correlations spike — all positions can move together
4. Limit total correlated exposure to a defined portfolio percentage
5. Uncorrelated assets (gold, bonds) provide genuine diversification

If you are long AAPL, MSFT, NVDA, and QQQ simultaneously, you are not diversified — you are quadruple long tech. Correlated positions respond to the same macro factors and will all move against you at once.

In risk-off events, correlations across asset classes often spike toward 1.0 — even typically uncorrelated assets move together. Account for this in your total exposure.