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The Morningstar Style Box for Alternative Funds

Jason Kephart, CFA

Jason Kephart: The Morningstar Style Box for alternative funds is a tool to help investors make better portfolio allocation decisions. Most investors choose to use alternative funds for their diversifying characteristics, but it's not always easy to tell what those characteristics are from looking at a fund's name or which category it's in. That's where the alternatives style box could help.

The alternatives style box is a two-factor map of what we consider to be the most important characteristics investors should keep in mind when choosing an alternatives fund. The Y-axis is a measure of a fund's correlation to the Morningstar Global Equity Markets Index, a market-cap weighted global equity index. The X-axis measures a fund's relative volatility to the equity markets. This gives a sense of how volatile a fund has been compared to equities. We chose global equities as our measuring stick because that is likely to be the most volatile part of every portfolio. If reducing portfolio-level risk through diversification is the goal, then investors need to be mindful of how a strategy relates to the equity market.

Keep an eye on, where we'll be publishing additional research papers on ways to build better portfolios using alternatives.