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Are Hedge Funds as Diversified as They Claim?

UBS is holding its Diversifying Strategies Forum on 3rd July 2018, at The May Fair Hotel in London. As part of the forum, a panel of fund managers will introduce their funds and explain their investment strategies to the participants. Most if not all of the funds claim to be highly diversified, as such diversity would reduce correlations with the market, preventing hefty losses in the event of adverse market conditions. Hence, the Quantflix team sought to investigate the validity of those claims, and assess the feasibility of each fund as hedge.

The following are the list of funds we have chosen to analyse from the forum as they had sufficient historical data of at least 2 years:

In order to test if the funds were diversified, a correlation was conducted against the S&P500.

The results are as follows:

From the data, it is evident that funds such as FORT Global Diversified and Alcova Master Fund are ideal for investment given their low correlation with the market at 0.041 and -0.008 respectively. Funds such as Allianz Global Investor are also considered to have low correlations with the market, though not as ideal as others. Hence, it is safe to deduce that the funds are indeed diversified.

To determine which fund is ideal for hedging, the returns must be considered. After all, it would be unwise to invest in hedge that generates negative returns. Thus, we normalised each fund’s returns, as well as the S&P500, to a value of 1 at the start of 2016, to draw a better comparison. The returns are as follows:

Source: GAO Proprietary research

From both results we can see that funds such as ISAM Systematic Fund producing negative returns given its drop-in value from 1. Such a result is indicative of it’s negative correlation with the market. On the other hand, we see Allianz Global Investors and Northlander Commodity Advisors outperforming the S&P500. This comes as no surprise, as the both possess relatively higher positive correlation coefficients.

What really stands out are funds Landscape Capital Management LLC and MYGALE Event Driven UCITS Fund. Though both funds bear negative correlations with the market, they were able to enjoy overall positive returns in the last 2 years. These makes both funds ideal hedging instruments as they are not only able to generate favourable returns during normal market conditions, but are also able to hedge against unexpected market crashes.

In conclusion, we must seek out funds with low correlations with the market, whilst identify those that can generate consistently positive returns when making investment decisions.

If you have any queries regarding other qualitative or quantitative factors when evaluating hedge funds, or have any other questions, do feel free to email us at

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