The spider chart is an alternative way of displaying data that may be useful at showing the strong diversification benefits versus different asset classes and alternatives. Correlations are looked at through a matrix form but the spider or radar graph may better display the most relevant information. Each node on the web may represent a different asset class and show the correlation of each to a single strategy.
The spider graph provides a simple holistic picture of diversification benefits for a single strategy as well as a group. In the graph above we should the correlation of the SocGen management futures against a battery of other asset classes. Any other alternative can be overlaid on top of managed futures to show the relative performance. We have taken the spider graph which looks at managed futures across different asset classes and enhanced it through running a comparison with a general hedge fund exposure through using the HFRI composite fund of funds index.
The spider shows that managed futures provide a great deal of diversification against equities and less against bonds. The HFRI composite does just the opposite. This shows the relative important of managed futures even within a hedge fund portfolio.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.
All hedge funds are not created equal as the return box chart shows for the post Financial Crisis period. There is a significant amount of dispersion across hedge fund styles. Over the period 2009-2018, the difference between the best and worst hedge fund category is almost 7 percent after we account for global equities and bonds.
The attraction to private equity and other less liquid alternatives is clear from the Guide to Alternatives by JP Morgan Asset Management. The return profile is much higher for private equity and debt funds than more liquid alternatives and global bonds; however, the dispersion in returns is multiples higher than what can be expected from other public categories.
