Market conditions over the past three years or so mean diversification has become an even holier grail than ever before.
At the same time as allocators have been hunting for diversifiers, some of the products that had diversification written on the tin, such as absolute return funds, have fallen sharply from favour among fund buyers.
According to data from the Investment Association, the Targeted Absolute Return sector was the overall best-seller among institutional buyers in 2013, 2014, 2015, 2016 and 2017.
But in 2019, 2020 and 2021 it was the overall worst-seller. It was also the worst-seller in two of four quarters in 2022 but the UK All Companies sector pipped it to the post for the year as a whole.
And with Abrdn announcing a review of the Gars strategy which was among the first absolute return funds to hit the UK DFM space, we thought we would run some numbers to see just how uncorrelated to equities the most widely-owned alternative strategies on the market are right now to see how much diversification they provide.
On average, the answer seems to be: 'not much diversification at all'.
Indeed according to FE the IA Targeted Absolute Return sector is positively correlated to the MSCI World index at 0.81 over three years, but for the most widely-owned funds among the allocators we cover the correlation is generally lower.
The product with the highest correlation is Church House's Tenax Absolute Return fund, at 0.82. This is the only fund among those owned by an allocator on our database to have a correlation to global equities that is higher than the sector average.
It is owned by four of the allocators we cover, and picked up a net one new buyer in 2022.
Artemis Target Return Bond, which is owned by three of the allocators we cover, has the second highest correlation of the funds owned by any DFM we monitor, at 0.74.
Only two of the most popular alternative funds owned by the allocators we cover have a negative correlation with global equities. One of those is BH Macro, which is now owned by three of the DFMs we cover, with Quilter Cheviot having bought into the fund during a share split at the start of 2022.
BH Macro has returned 18 per cent over the past year, a time period when the average fund in the hedge fund sector lost money, and when the average fund in the IA Global sector gained 7 per cent.
BH Macro is negatively correlated to global equities to the tune of 0.05 per cent.
The fund with the lowest correlation to the MSCI World index is Neuberger Berman Uncorrelated Strategies. This also happens to be one of the most popular alternative funds in our database, owned as it is by eight DFMs. Interestingly this is also one of the most popular alternative funds in our ESG database.
The fund is negatively correlated to global equities to the tune of 0.43.
It is around £2.5bn in size and a peek at its top holdings reveals a series of bond futures.
The fund has returned 3 per cent over the past year, compared with a loss of 8.4 per cent for the average fund in the IA Flexible Investment sector in the same time period.
While there isn't a standard definition of what an alternative fund is, or should be, the pursuit of uncorrelated returns is likely to be a major theme of the post-QE world ahead.