According to Simon Lack of SL Advisors, and author of The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, “[uncorrelated returns] is what hedge funds try to provide,” but does today’s hedge fund universe really even accomplish this basic goal? Consider that from 12/31/1993 to 9/30/2017, the Credit Suisse Hedge Fund Index has had a 0.58 correlation with the S&P 500. The HFRI Fund of Funds Index has had a 0.62 correlation with the S&P 500 over this time. The correlation between the Barclays US and Global Aggregate Bond Indices has been 0.70 over this time. This means hedge funds have barely been less correlated with stocks than US bonds have been with global bonds
For the past year and a half (3/31/2016 – 9/30/2017), the Credit Suisse Hedge Fund Index has had a 0.57 correlation with the S&P 500. The HFRI Fund of Funds Index has had a correlation of 0.61 with the S&P 500. Correlations with global stocks are even stronger than with large cap domestic stocks. The correlation between the Credit Suisse Hedge Fund Index and the MSCI ACWI is 0.74. The correlation between the HFRI Fund of Funds Index and the MSCI ACWI is 0.84.
Why White Oaks Is Better:
Contrast that with the alternative investments that White Oaks uses. The White Oaks Freedom Fund is a fund for qualified purchasers only. This fund only invests in alternative investments. It is essentially a carve-out of the alternative exposure in the other White Oaks pooled funds. Since its inception (3/31/2016 – 9/30/2017) the White Oaks Freedom Fund has had a 0.25 correlation with the S&P 500 and a 0.37 correlation with the MSCI ACWI. This is a significant improvement in correlation versus what the broad hedge fund universe offers.
Low correlation is important because it makes an investment a better diversifier. Better diversification reduces volatility without necessarily compromising on expected return. I go into more detail on this concept in The Magic of Diversification and Bob Klosterman discusses why lowering volatility is important in Alternative Investments: How Less Is More.
Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that diversification or any other investment strategy will be successful.
Alex Duty, CFA®, CIPM is a Portfolio Manager at White Oaks. He performs investment research, asset allocation of various strategies, assesses client portfolios, and assists with overall client communication.