Is the great correlation over?

The unprecedented correlation between asset classes that stemmed from the financial crisis appears to be over, strategists said Tuesday at the InvestmentNews Alternative Investments Conference in Chicago. Advisers need to keep that in mind as they build portfolios, even though it may not seem like a good idea, given the stock market's 20% rally this year. “In this market, being told you need more correlation is like being told you need more fiber in your diet,” said Brian Ziv, head of the William Blair Hedge Fund Strategies Investment Committee. “I'm going to go out on a limb and predict the stock market's not going to return 20% a year.” The head winds that caused correlations to all go to one, which means everything was moving in the same direction, were uncertainty, a flurry of economic surprises and low interest rates. Those head winds are much weaker than they have been in the previous five years, Mr. Ziv said. Even though correlations are starting to normalize, investors seem to be forgetting the benefits of diversification, particularly with managed-futures funds, said Afroz Qadeer, chief investment officer at Equinox Institutional Asset Management. Managed-futures funds took off in 2009, 2010 and 2011 because of their uncorrelated returns in 2008, he said. With the equity markets on a tear and managed futures struggling, investors are fleeing managed-futures funds this year even though they are getting exactly what was promised. The average money market fund has a three-year annualized return of -4.48%, way below the S&P 500's 17% annualized return over the same time period. “If you bought managed futures for negative correlation, you're getting it,” Mr. Qadeer said. “If you just want things that move like the equity market, you should buy all stocks.”