Applied Research

Hedge fund portfolio diversification during crisis

Jan 2023, By AlternativeSoft

It’s known that during crisis periods correlation between all assets increases substantially. In this article, we investigate if a hedge fund investor can keep their portfolio well-diversified during a crisis by investing across different strategies.

We selected 20 Hedge Fund Indices and built correlation matrix for them during two equal time periods. The first period is before the COVID-19 crisis, the second is starting with the COVID-19 crisis. Both period lengths are 18 months.

Table 1 - Correlation matrix for Hedge Fund Indices (Jul 2018 – Dec 2019). Average Correlation = 0.49

Table 1 represents pre-crisis period (Jul 2018 – Dec 2019). Overall average correlation is 0.49 with

• HFRX EH: Equity Market Neutral Index - Daily
• HFRX Macro: Systematic Diversified CTA Index - Daily
• HFRX ED: Merger Arbitrage Index - Daily
• HFRX Macro/CTA Index - Daily
• HFRU Macro Index - Daily
• HFRX Emerging Markets Composite Index - Daily

being the best diversifiers by having the lowest....

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