He believes too many alternative fund managers are fixated on non-correlation to the point where performance suffers. "If you don't have positive returns, you don't add value to an investor's portfolio," Levinson says.
Papagiannis says part of the problem with alternative funds last year was that many of them were too correlated to traditional assets--such as funds in the multialternative category. "A lot of those are bad funds," she says, adding that most of them are in fund of funds and they're not finding the best managers. She adds that some of those not taking the fund of funds approach employ equity strategies that are highly correlated to traditional equities.
The good news is that five of the seven alternative fund categories tracked by Morningstar are up this year. But so far at least, they trail the S&P 500's roughly 8.3% gain by a healthy margin.
--Jeff Schlegel