Inside the Morningstar Style Box for Alternatives |

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Inside the Morningstar Style Box for Alternatives

Where do liquid alternative funds fall in the alternatives style box?


We recently introduced the Morningstar Style Box for alternative funds, a new research framework for evaluating liquid alternatives investments that will be available to Morningstar Direct clients at the end of October. We first introduced the alternatives style box in our October 2016 paper, which showed how its main components of correlation and volatility can help investors quickly and intuitively gauge a fund’s diversification potential. In this follow-up report, we take a bottom-up look at the alternatives universe by placing each liquid alternative fund into one of the alternatives style box’s nine regions. We find significant diversity among alternative strategies, even among those in the same Morningstar Category, underscoring the potential importance of tools like the alternatives style box for making good comparisons and conducting thorough evaluations.

Key takeaways

• Alternative strategies come in many different varieties, and funds within the same Morningstar Category that pursue very similar strategies can still have very different diversification characteristics. In this paper, we illustrate these features by examining funds that fall into the four corners of the alternatives style box.

• The Morningstar Style Box for alternative funds can help investors more easily make comparisons between funds in different categories and find those with similar diversification attributes.

• Considering both an alternative fund’s correlation and relative volatility to global equities can help an investor set expectations for a strategy and make portfolio-allocation decisions. Setting realistic expectations may also improve investor outcomes by staving off the performance-chasing that often undermines results.


Many alternative strategies derive their appeal from the potential to improve a traditional portfolio by further diversifying it, either by delivering an uncorrelated return stream or by dampening volatility and reducing downside. In practice, determining whether an alternative strategy can deliver one or both of those benefits can be a challenge for investors. To make it easier to evaluate the diversification benefits a liquid alternative mutual fund has conferred over time, we created the Morningstar Style Box for alternatives. The alternatives style box plots alternative funds based on correlation and relative volatility to global equities based on the trailing three years of monthly returns. More about the methodology behind the alternatives style box can be found here. Fig.1 shows the positioning of funds in the alternatives style box as of July 2017.

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