For the first half of 2013, the correlation between the S&P 500 and alternative investments has increased—a trait not desired by most advisors. Correlation does not measure degree of movement. Instead it assigns a number between +1.0 and -1.0 to show whether two investments tend to move up and down together.

 

According to analysis by Leuthold Group, during three periods over the past 20 years (tech bubble of 1994-1999, the rise of alternatives from 2000-2008, and the post-financial crisis years of 2009-2013), commodity, REIT, and hedge fund returns saw a “significant increase” in their performance correlation to stock returns since 2009. The largest correlation increase (to the S&P 500) since 2009 was with commodities.

 

According to Leuthod, “The popularity of high-frequency trading and ETFs are big long-term drivers of cross-asset correlation.”

 

Correlations: Alternative Funds vs. S&P 500

[5 years thru June 2013 / 6 months thru June 2013]

 

Mutual Fund Category	5-Year Correlation	6-Month Correlation
Real Estate	~ 0.8	~ 0.4
Emerging Markets (stocks)	~ 0.8	~ 0.7
Precious Metals	~ 0.3	~ 0.9
Commodities	~ 0.7	~ 0.7
Multi-Currency	~ 0.5	~ 0.5
Multi-Alternative	~ 0.9	~ 0.9
Market Neutral	~ 0.2	~ 0.8
Managed Futures	~ -0.2	~ 0.6
Long/Short Equity	~ 0.9	~ 0.9