In the end, nearly all of these investors in so-called “alternatives” are doomed to fail because of unrealistic expectations and unreasonably short holding periods. They don’t know what they own and they are unwilling to take the time to understand the why, relying solely on past returns (damned lies and statistics).

The WisdomTree Managed Futures product was in fact uncorrelated to stocks (-.04) and bonds (.01). But it was the other side of uncorrelated that transpired, the side no one wants to talk about or accept: the times when the “alternative” is down when the other things in your portfolio are up. If something is truly “alternative” and uncorrelated, these times will inevitably happen.

That’s not a defense of WDTI but a reality of diversification: if everything in your portfolio is “working” at the same time, you’re probably not as diversified as you think. I have no idea if WDTI is a good or bad investment. That may seem silly to some because its returns have been subpar.

How could something that has lost money for six years possibly be anything but bad?

  • Well, while six years seems like an eternity, we know some of the best strategies in history have had negative 6-year returns. How can we be sure that WDTI is not one them and just happened to start out with a bad string of luck? We can’t.
  • We also know that past performance tells you nothing about the future. If investing was as simple as picking the best performing strategies and asset classes ex-post (after-the-fact), we would all be infinitely wealthy. But the market doesn’t work like that, does it? In fact, the opposite is more likely to be true (see “The Harm in Selecting Funds that Have Recently Outperformed.“)

I have come to understand that this thinking, while unfortunate, is inevitable. Investors love the idea of non-correlation and diversification so long as everything is going up and to the right – and at the same time.

That’s true of stocks, bonds, gold, hedge funds, value, momentum, and any other asset class or strategy you can think of. So long as it’s going up, it is “working” and there is no risk. But the minute it starts going down, that’s a problem that requires immediate action, for the other side of uncorrelated is simply intolerable.



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