Portfolio Diversification Not Working? Look at Price Patterns: Expert

Market correlations have once again been rising - with stocks, bonds and even gold dropping in recent weeks on worries about Greece. That's making it harder for investors to use traditional forms of portfolio diversification. Instead, according to one fund manager, investors should be looking at technical price patterns.

NYSE trader
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NYSE trader

"Your equity-commodity correlation over 20 years is about 0.15 but over the last 2, 3 years, it has basically come to 1,” Jason Gerlach, Principal and Managing Director, Sunrise Capital Partners, told CNBC Asia’s “Squawk Box”. Gerlach said his firm used price trends rather than a view of the macroeconomy and headlines to decide their trading strategy.

“We believe that price really tells us all we need to know,” Gerlach said. “We do care about Europe but we think that what’s happens to Europe is going to be manifested in the price of the assets, it’s that simple, and the patterns that those prices follow.”

Sunrise Capital, is a so-called Commodity Trading Advisor (CTA), which makes money trading on futures and options or managed futures. These funds use 'black box' trading strategies that look at technical charts to identify changes in trends and spot opportunities in assets as diverse as grains, equity indices, commodities, currencies and bond futures.

"We’re going to be late to most rallies and we may be late to some collapses," Gerlach said. "But we will get in there once that trend is established, we will hold on to it, we will stay in it and we often will stay in it a little longer."

Sunrise is currently short on cotton, sugar, three-month Canadian Treasurys, the euro, the Swiss Franc and all metals, including gold. The firm is long on soybean meal, bonds, the British pound, and the Nasdaq Composite Index, Gerlach said.

CTA funds have grown in popularity, since the financial crisis in 2008, when the S&P 500 Index plunged more than 33 percent. CTA funds made an average of 15 percent for investors, according to Gerlach, that year. Gerlach said Sunrise made 35 percent for its investors on its flagship fund that same year.

Since then, CTAs have underperformed the S&P 500, according to Reuters, with returns of just 4 percent in total over the past three years, compared to gains of 49 percent for the S&P 500. So far this year, CTA fund returns have been flat, according to the benchmark Barclay CTA Index.

Despite that disappointing performance, managed futures continue to generate interest because of their promise of portfolio diversification and their ability to hedge risks in the event of another big market drop.

“The memory now of 2008 is starting to fade. So a lot of people have kind of stopped worrying about 2008 crisis a bit, forgotten the interest they had in those (technical trading) strategies, and suddenly find themselves positioned in a very tricky place again,” he said. “And if the euro breaks, or if there’s a Middle East crisis or something and brings everything down with it, they’re going to get burnt in the exact same way.”

By CNBC’s Jean Chua.