The "impossible" triangle for managed futures (or any hedge fund)

The 'impossible" triangle is the combination of diversification (low correlation with an equity benchmark), stable positive return, and "crisis alpha" or positive excess gains in the face of sustained equity decline. Can it be achieved? You can usually only achieve two of the three. It may not be impossible, but it is hard to get all three. It. can just be what is your tolerance to give-up on one of the three.

Diversification can be achieved through trading different assets long and short from the main target or benchmark asset. If you want diversification from equities, trade commodities, currencies, and fixed income. Trade both long and short as well and you will achieve a low correlation with equities. The diversification will pull down returns during a strong equity bull market yet serve an investor well in a bear market. The diversification will cancel some of the more extreme returns, but there is a likely gain in Sharpe ratio.  

If you want to have stable returns in all environments, you will have to trade a combination of styles to ensure that no one style will drive returns negative. Diversification of styles will smooth returns and help with diversification; however, there will be less convexity or excess returns at extremes.

If you want crisis alpha or positive convexity, you must have a high concentration of risk in trend-following; however, by doing this you will likely have lower returns during periods of stable markets. Hence, the convexity is only achieved through giving up the more stable returns. 

So, an investor is going to have to focus on two at the expense of the third. The question is what you can live with or what is more important for your overall portfolio. This is the personal choice that must be made by investors.