Alts: Volatility Is Not Your Enemy
If returns are uncorrelated and positive.
April 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- The less correlated an alternative strategy is, the higher its volatility should be
- Enables more efficient capital allocation
- However, only if the returns are positive
INTRODUCTION
Prior to 2000, the hedge fund industry managed less than $500 billion in assets, and most funds reported performance quarterly or annually. Much like private equity, this infrequent reporting had a smoothing effect on returns – the intra-month and intra-quarter swings that inevitably occurred were simply never visible to investors.
Today, with the industry managing close to $5 trillion, monthly reporting has become the norm, and many funds – particularly European UCITS vehicles and ETFs – publish daily returns. Greater transparency is welcome, but it has come at a cost: investors are now fully exposed to the day-to-day rhythm of markets, and high volatility has become something of a negative attribute. Multi-strategy hedge funds like Millennium, which diversify across strategies and run sophisticated risk management systems specifically designed to dampen volatility, have risen to dominate the industry as a result.
But should investors actually treat volatility as a flaw in an alternative investment strategy?
In this article, we argue that it is not the enemy.
VOLATILITY VS CORRELATIONS
Throughout this article, we will use gold as a proxy for an uncorrelated strategy. Between 2007 and 2026, gold’s average correlation to the S&P 500 was just 0.1 – but that figure masks considerable variation. At its most diversifying, the correlation fell to -0.6 in 2015; at its least, it rose to 0.6 in 2012. The diversification benefit, in other words, was far from constant.
