Cue the Natural Disasters

Just when everything seemed to be on solid footing again, with stocks not named Bank of America seeming to have found a bottom, we have an earthquake in Virginia (seriously), and a hurricane threatening the Eastern Seaboard of the US

They evacuated the Pentagon and sky scrapers in NYC following the quake, and everyone is checking on the nuclear reactors around the mid Atlantic right about now; but all in all it seems to be a non-event.  Right now theyre saying it was a 6.0.

But if the earthquake isn’t enough to shake those of you in the Mid Atlantic, Hurricane Irene is keying up to make a run right at the same area.  From the excellent Dr. Jeff Master’s WunderBlog (highly recommended for those of you who like to track and follow hurricanes), we have the following:

Irene a potential multi-billion dollar disaster for New England and the mid-Atlantic

Though it is still possible the core of Irene will miss the U.S. the current NHC official forecast would mean that Irene would bring destructive flash flooding, significant beach damage, and widespread power outages due to tree damage along the entire U.S. coast from North Carolina to Maine, costing several billion dollars. If Irene ends up skirting the Outer Banks of North Carolina and not significantly weakening, then plowing through the mid-Atlantic and New England states as a Category 1 or 2 hurricane, it could become one of the ten most damaging hurricanes in history…. Currently, it appears that Irene will hit North Carolina on Saturday, and New England on Sunday. I strongly urge all residents of the coast from North Carolina to Massachusetts to assess their hurricane preparedness immediately, and anticipate the possibility of hurricane conditions this weekend.

First and foremost, our thoughts and well wishes go out to those living on the East coast as they prepare and deal with these events.

That being said, it seems as opportune a time as any to remind that diversification isn’t necessarily for the known risks to our economy and markets such as another recession, falling corporate earnings, etc.; but more for the unknown risks such as debt downgrades, earthquakes, hurricanes, 100 year droughts, and so on.

The unknown risks, the outliers, are the ones not priced into anyone’s models, not discounted in a commodity’s price, and so on. It is the unknown risks which blow up short volatility programs and make a living for long volatility managed futures programs. It is the unknown risks which cause the rare outliers which drive managed futures performance.

How do they catch the outliers? It isn’t magic or a crystal ball which lets them know which move is a real one and which is a fake breakout. They catch the outliers by being in every move, even the ones which do not work. They catch the 10 sigma move by being involved in all the 1 sigma moves which end up being losers. They catch the outliers by not focusing on a single sector or market direction, but casting as wide a net as possible to catch a budding outlier which may have been missed by a narrow focus.

Most all other types of investments are set up to fail in the case of unforeseen shocks to the system. To make your portfolio downgrade/earthquake/hurricane proof – you need investments which look for outliers. You need managed futures.

Asset Class Scoreboard through July 2011

File the following into the mostly useless category. Weve got our monthly asset class scoreboard update below, but after the fireworks so far in August, the YTD numbers are already much different, with stocks and real estate now negative for the year.