Minimum Correlation Allocation – How It Works in Fincanva

What It Is

Minimum Correlation allocation focuses on reducing the average correlation between assets in your model. The goal is to enhance diversification by combining assets that tend not to move in the same direction, thereby potentially lowering overall portfolio risk.

What It Does in Fincanva

• Logic: Allocates more capital to assets with lower correlations to others in the portfolio

• Simulation Behavior: At each rebalance, asset relationships are evaluated, and weights are optimized to reduce the average pairwise correlation

• Computation: Based on the Minimum Correlation Algorithm (MCA) as proposed by Varadi, Kapler, Rittenhouse, and Bee, implemented through an efficient optimization routine

• Constraints: Positive weights only—no short positions are allowed in models

Pros

• Promotes diversification by reducing exposure to correlated assets

• Can reduce total portfolio volatility without sacrificing return potential

• Helps build more stable and resilient investment strategies

• Especially useful when combining assets across different sectors or factors

Cons

• Asset correlations can shift over time, requiring periodic re-optimization

• More computationally intensive than simpler allocation methods

• Does not account for individual asset risk or return—focus is purely on relationships

• May underweight high-quality assets if they are highly correlated with others

Where You Can Use It

• Portfolios: Not available

• Models: Yes

When to Use It

• Best for diversification-focused strategies

• Useful when combining assets from similar categories or asset classes

• Ideal for reducing overexposure to thematic or sector-specific risks

• Great for building risk-aware models that aim for long-term stability

Example
If Asset A is highly correlated with Asset B (correlation = 0.9), but Asset C is only loosely correlated with Asset A (correlation = 0.2), the Minimum Correlation method will prioritize Asset C over Asset B, even if they have similar returns.

• Models: Available on Advanced, Ultimate, and Professional plans

• Portfolios: Not available