Hedge funds are supposed to be the ultimate diversification tool. The idea is that the returns post low/negative correlation with broad measures of conventional investing strategies and yet somehow manage to deliver positive returns when the standard strategies tumble.
He goes on to note that some hedge fund managers do deliver but not enough of them do. The other day I had a post about 18 year cycles. If you believe in that concept then you should think we have eight-ish more years of round trip to nowhere and should be ready to quickly lighten up if whatever indicators you look at flash a warning.
In the last few years there have been very few things that have truly offered a low or negative correlation to the large declines of equities. US treasury paper has done so along with gold, inverse index funds, some absolute return fund and one other that I can think of; cash.
At some point markets will have another up cycle like 1982-2000 (even if the magnitude is not the same and even if the US lags other markets) and when that time comes risk will be rewarded and "diversification" will go back to meaning picking the stocks, sectors, countries, whatever that go up the most as opposed to what diversification means now which is trying to protect assets.
When the market warns there might be a problem with demand I want to protect assets, period. I thought of a slightly different way to frame this concept. In past posts I have often talked about avoiding the full brunt of down a lot and my belief that down a little goes with the territory of investing (trading may be a different matter). In that context the search and use of lowly correlated assets like the ones mentioned above could be thought of as keeping down a little, in the portfolio, from turning into down a lot as the market goes from down a little to down a lot.
Obviously not everyone views it this way, and short term emotions often impede long term logic but the ultimate goal of investing (and maybe trading too) is to have enough money when you need it.