The real benefit of managed futures is the provision of sources of returns that are uniquely different from traditional stocks or bonds or even hedge funds. For instance, hedge funds have been marketed as offering unique risk and return properties that are not easily available though traditional investment securites or investment products. These return opportunities stem from the expanded universe of securities available to trade and to the broader range of trading strategies.

One reason for the supposedly low correlation and potential diversification benefit is that hedge funds often describe themselves as employing skill-based investment strategies that do not explicitly attempt to track a particular index. Since their goal is to maximize long-term returns independenfly of a prescribed traditional stock and bond index, they emphasize absolute returns and not returns relative to a predetermined index. It is important to realize, however, that while hedge funds do not emphasize benchmark tracking this does not mean that their entire return is based solely on manager skill or is independent of the movement of underlying stock, bond, or Forex NZ .

Hedge fund managers often track a particular investment strategy or investment opportunity. When appropriately grouped, these hedge fund strategies have been shown to be driven by the same common market factors such as changes in stock and bond returns or stock market volatIity that drive traditional stock and bond markets. For instance, in Exhibit 10, the performance of various hedge fund strategies is reported relative to stock and bond markets as well as other factors that have been shown in prior studies to explain returns (increase in risk – i.e., S&P 500 implied volatility). As expected, results show that equity biased hedge fund strategies have high correlation with the same factors as long- equity (e.g., S&P 500). In contrast, managed futures universe returns are not correlated with the stock and bond markets or changes in equity market volatility but track indices that reflect trend-following return patterns.