Diversification: It's one of the primary reasons investors like funds that use hedging strategies. Now that the market is experiencing some volatility, investors are more likely to gravitate to those funds, but there's a problem. Alternative funds may be becoming more correlated with stocks, Murray Coleman of the WSJ
A study by Leuthold[profile]
Group shows that from 1994 to May of this year, hedge fund correlations have begun inching up to 0.75, almost 36 percent higher than earlier levels. The study found hedge funds are tending towards the movement of stocks three-quarters of the time, Coleman reported.
Advisors using alternative funds have been more likely to use cheaper ETFs and ETNs, but alternative ETFs cost 136 percent more than a traditional ETF rival, Morningstar data shows.
To use an alternative-fund strategy besides hedging, Mark Donnelly, a PM at AEPG Wealth Strategies
, said that he holds a wide variety of ETFs, such as commodities, natural resource stocks and Treasury Inflated Protected Securities.
"The big picture view is that increasing correlations between alternatives and equities are probably here to stay," Mr. Donnelly says. "But it's a mistake to lump all of these funds together."
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