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Matthias Knab, Opalesque:

In a new research paper from Morningstar published today, Jason Kephart and Maciej Kowara put alternative funds to the test. Though still relatively new, few alternative mutual funds have conferred meaningful diversification benefits in recent years, and the last five years have been one of the worst periods for alternative strategies since 1983.

According to their research, the plight of the alternative strategies is due primarily to two factors: stock and bond market returns, and rising correlations.

In the new research paper, "Liquid Alternatives Have Yet to Prove They Belong in Portfolios," the senior Morningstar analysts ran a test to evaluate whether liquid alternative funds would have improved the risk-adjusted returns of a well-diversified 60/40 portfolio of stocks and bonds. This framework for evaluating alternative funds builds upon the Morningstar Style Box for alternative funds, which makes it easier for investors to gauge a funds' diversification characteristics.

Until relatively recently it has been beneficial to add at least some hedge-fund exposure to the traditional allocation, as evidenced by the fact that the traditional portfolio's Sharpe ratio rose after adding an allocation to the HFRI Index. It's only in the past 10 years that the benefits of using hedge fund strategies have basically vanished.

Two factors went against hedge fund strategies in recent years

There are two factors that have gon......................

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