Multi-asset trading has been gathering momentum in recent times as brokerages look to expand capabilities and broaden their access. In parallel with this, traders have been increasingly adopting multi-asset strategies, particularly amid global economic and geopolitical uncertainty. This article explores multi-asset classes, how they work and the opportunities they offer for both traders and brokerage companies.
A multi-asset class is a combination of asset classes used as an investment that contains several asset classes, thereby creating a portfolio of assets. Hence, multi-asset class investments increase the diversification of an overall portfolio by distributing investments across several classes. Here are several reasons why multi-asset trading has become so popular for traders.
Multiple Opportunities In the event one market happens to be trading flat, the chances are that another will be more active. Traders who trade a single asset class can easily miss good opportunities but via a multi-asset broker, they have access to a wide range of products which will enable them to benefit from both rising and falling markets. For example, a trader may choose to hold a long-term stock position and decide to day-trade futures on the side in order to capture short-term market movements.
Tactical Asset Allocation Different securities tend to perform better at different stages of the business cycle. Hence, traders often try to capture these cyclical performances at their best by allocating capital to the specific asset classes showing most potential for gains. This is a strategy known as tactical asset allocation, and requires access to a wide range of financial instruments and multiple asset classes. As an example, a trader may want to consider moving into safe-haven assets such as gold, with a looming recession on the horizon.
Hedging Hedging is an effective risk-management strategy that many traders use to counter short-term risks in their core investments. For example, if a trader holds a portfolio of tech stocks but is concerned about the impact of an upcoming NFP announcement and happens to have access to derivative products such as futures and options, he could take a short position on a representative index such as Nasdaq during the event period to hedge against the possibility of potential losses.
Diversification Creating a diversified portfolio is one of the key principles of proper investment. Traders can reduce their overall risk by making sure they don’t put all their eggs into one basket. This makes it easier to handle volatility swings while maintaining ongoing, stable returns. Those investing in stocks may diversify across sectors, for example, but for a well diversified portfolio, looking for positions in multi asset classes such as Forex, equities and commodities may be a more cautious approach.
Multi-asset brokers usually offer their clients a margin account so they can trade derivatives with leverage. Experienced traders tend to prefer to trade with leverage as it is an efficient use of their capital. Leveraged derivative trading allows traders to access markets that would otherwise be unavailable to them and to take position sizes that they might otherwise not be able to afford. This increases their profit-potential (and potential for losses).
Having access to a comprehensive range of investment products is not only advantageous for retail traders, but for brokerage companies too, even though from a systems and technology point of view, multi-asset trading adds some complexity due to the requirement to be connected to multiple venues. A multi-asset trading platform will also need to take into account the regulatory regimes governing the various asset classes and risk management can become more complicated. However, many firms these days have platforms that allow them to connect to multiple assets in very easy and efficient ways which enable them to gain a competitive edge.
Overall, there are many reasons why multi-asset trading is on the rise and thanks to the growth of the “as-a-service” technology model and the development of hundreds of financial APIs in recent years, multi-asset trading has become not only more accessible to traders, but a lot easier and much more cost-effective for brokerage companies looking to expand their horizons.