New paper by GIC and JPMorgan Asset Management provides another classification for hedge funds. See "Building a Hedge Fund Allocation: Integrating Top-down and Bottom-up Perspectives". Investors expect several specific yet not mutually exclusive characteristics from their hedge fund portfolios:
- Returns with low correlation to equities
- Capital preservation during equity market drawdowns
- Alpha or excess returns above a market benchmark.
If you want to obtain more diversification, pick managed futures. All the managers in this category have correlations that are below .5 and almost half have negative correlation with equities.
Managed futures also does well when making comparisons with global drawdowns. It and global macro are the only strategies that have positive returns, on average, during drawdowns.
It is not guaranteed that managed futures will generate positive performance during drawdowns; however, the likelihood is much higher than other strategies.
The alpha from managed futures is positive and strong versus other strategies and it delivers a much lower beta than other hedge fund styles.
The study identifies four major strategy buckets and finds that the loss mitigation strategies have low correlation with equities, high alpha, and high returns during periods of stress which makes for a great addition to any portfolio. Loss mitigation managers are a good diversifiers relative to other hedge fund styles.
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