Study Shows Global Macro and Managed Futures Diversify Equity Portfolio Best

May 14, 2011

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Strategy & Asset Class Correlation :

  • The study showed most alternative asset classes that claim diversification, including various hedge fund strategies, are closely related to passive equities.
  • Fifteen of the 24 indexes examined (62%) share a high correlation to traditional passive equities, depicted as the green shaded region, while the thickness of the grey lines depict correlations between two investment types.
  • Eight of the 10 hedge fund strategies share a strong relationship to passive equities as does real estate and infrastructure.
  • Private equity shares a high .78 correlation to U.S. large caps, yet prevailing asset class-based allocation taxonomies still classify private equity as an “alternative.”
  • Systematic Global macro and Managed Futures prove to be two the most diversifying investments studied clip_image001

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Indices Used in Study

Equities

  • U.S. Large Cap S&P 500 Index
  • U.S. Mid Cap S&P Midcap 400 Index
  • U.S. Small Cap S&P Small Cap 600 Index
  • Non U.S. MSCI AC World Index Free ex USA Value
  • Emerging Markets MSCI EMF (Emerging Markets Free)

Real Assets

  • Infrastructure S&P Global Infrastructure TR Index (12/01 – 6/10)
  • UBS Global Infrastructure & Utilities 50-50 TR Index (1/99 – 11/01)Real Estate FTSE EPRA/NAREIT U.S. Index
  • Commodities Dow Jones – UBS Commodity IndexTIPS Citigroup U.S. Inflation-Linked Securities Index

Fixed Income

  • U.S. Corps Merrill Lynch Corporate Master Bond Index
  • U.S. Govt Barclays Government Bond Index
  • U.S. Munis Barclays Municipal Bond Index
  • Non U.S. Govt Citi World Government Bond Index
  • U.S. Govt. (2-Yr Treasuries) U.S. 2-Year Treasuries (TCMNOMY2)

Alternatives

  • Private Equity Cambridge Associates LLC U.S. Private Equity IndexEvent Driven Dow Jones Credit Suisse HFI Event Driven
  • Long-Short Equity Dow Jones Credit Suisse HFI Long-Short Equity
  • Distressed Securities Dow Jones Credit Suisse HFI Event Driven -Distressed
  • Multi-Strategy Dow Jones Credit Suisse HFI Multi-Strategy
  • Fixed Income Arbitrage Dow Jones Credit Suisse HFI Fixed Income Arbitrage
  • Convertible Arbitrage Dow Jones Credit Suisse HFI Convertible Arbitrage
  • Risk Arbitrage Dow Jones Credit Suisse HFI Event Driven – Risk Arbitrage
  • Global Macro Dow Jones Credit Suisse HFI Global Macro
  • Managed Futures Dow Jones Credit Suisse HFI Managed Futures

Strategy and Asset Class Diversification Study

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