Profiling Correlations: Alternative Strategies - Part 2

Last month’s review of return correlations highlighted the challenge of finding strong diversification opportunities among the major asset classes for designing and managing portfolios. Does the landscape offer better choices if we expand the opportunity set by adding alternative strategies to the mix?

As a preliminary test, let’s compare a core set of the major asset classes with nine ETFs that offer something different from the standard fare. The list of funds below barely scratches the surface of what’s available for re-engineering conventional markets. For purposes of an initial test, however, these nine ETFs provide a reasonable starting point for considering the possibilities for diversifying portfolios.

IQ Merger Arbitrage (MNA)
WisdomTree Managed Futures Strategy (WTMF)
IQ Hedge Multi-Strategy Tracker (QAI)
ProShares RAFI Long/Short (RALS)
JPMorgan Diversified Alternative (JPHF)
PowerShares S&P 500 Low Volatility (SPLV)
Hull Tactical US (HTUS)
Global X JPMorgan US Sector Rotator (SCTO)
PowerShares DB G10 Currency Harvest (DBV)

The names above target a wide array of strategies, including mergers and acquisitions, long/short equity, managed futures, hedge fund-oriented strategies, US equity sector rotation, low volatility equity, and a multi-currency strategy designed to exploit what’s known as the carry trade: borrowing money in low-yielding currencies to invest in higher-yielding currencies.

The table below shows how the alternative funds compare with ETFs that represent the core set of the major asset classes (for a list of funds/tickers, see this post here), based on correlations via daily returns for the past 12 month through yesterday (April 3). The key takeaway: adding alternative ETFs expands the number of low and negative correlation pairs compared with limiting funds to the standard market choices.