Low Correlation Funds

Low correlation funds are providing a diversification alternative to public markets.

Low correlation funds are intended to provide investors with returns that are not tied to or affected by public markets, like bonds or equities for example.

Hence, The strategies employed by low correlation funds do not rely to a large degree on public markets, whether those markets are going up or down.

Low correlation funds can pursue a wide range of unrelated or uncorrelated investment strategies. The emphasis is on underlying assets that could perform very differently from public markets in the event of, for example, a major crisis on the scale experienced in 2008-2009. Low correlation funds may still be affected by longer term economic trends, such as a severe economic recession, but investors need them to behave differently to other funds if public markets react negatively to events.

Many allocators were taken by surprise in 2008-2010 when seemingly diversified portfolios of funds, including hedge funds and commodity-based strategies, were all severely affected by the turmoil that followed the collapse of Lehman Brothers in New York. This prompted a hunt for low correlation funds, capable of holding their value under circumstances that might negatively affect other classes of fund.

One of the sub-strategies that has emerged since 2010 has been loan funds. These are funds that make multiple loans to commercial enterprises every year, often replacing banks in the financing chain, delivering much-needed credit to businesses that wish to make infrastructure improvements. They tend to qualify as low correlation funds by holding a portfolio of secured loans that pay interest regularly, providing a source of returns to the fund not generated by equity market moves.

Low correlation funds are here to stay: investors value funds which can play a role as further diversification in their portfolios. In addition, many low correlation funds pursue strategies based on easy to understand and transparent approaches to investment finance which investors find reassuring.

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