Diversification is one of the most fundamental guidelines when it comes to investing, and some investors may think that hedge funds are the easiest way to get it. However, hedge fund diversification is nothing but a pipe dream for some strategies, according to one firm’s study.

Meanwhile, investors are bullish on WTI Crude, and institutional investors are boosting their positions in 30-year Treasury futures to 18-month highs.

WTI Crude longs close to record highs

In their Dec. 30 “Futures and HF Positioning Report,” Bank of America Merrill Lynch analyst Jue Xiong and team reported that buy-side net long positioning in WTI Crude stood in the 99.4 percentile last week, bringing it close to a record high.

Despite the extreme bullishness of the positioning, however they report that the trend is still leaning toward the bullish side. The only thing that could break the bullish trend is a move under 44.1/ 42.2, they explained, which are the 50-week SMA and chart support.

Another favorite asset class last week was 30-year Treasury futures as institutional investors added to their long positions there, boosting it to the highest level since July 2015. Meanwhile, hedge funds added the most to their 30-year Treasury short positions in nearly two years, going back to February 2015.

The BAML team reports that technicals point to a rally in 30-year Treasuries this year.

Another key metric the analysts highlighted from last week was that the buy-side was the most short on JPY/ USD since December 2015. Despite this, the net position was 43% lower than the short observed in January 2007, they added. Further, the yen has gotten stronger over the last couple of weeks; however, they believe that the Japanese currency will weaken against the U.S. dollar in the longer term. In order to avoid this, a move below 114.97/ 114.74 is needed.

Institutional investors unload S&P 500 stocks

The BAML team reported last week that institutional investors unloaded $5.5 billion worth of S&P 500 futures. Additionally, they sold $700 million in Russell 2000 futures, bringing the aggregate positioning to $12.2 billion, and $600 million worth of MSCI EM futures, bringing the position to $16.5 billion.

Hedge funds unloaded $400 million in MSCI EM futures and $300 million in Russell 2000 futures. However, they bought $4.7 billion in S&P 500 futures and $1.1 billion worth of NASDAQ 100.

Meanwhile, institutions picked up $9.8 billion worth of 10-year Treasuries and $2.3 billion in 30-year Treasuries, but they sold two-year Treasuries to the tune of $1.9 billion last week.

Hedge funds, however, did the opposite of institutional investors, unloading $10.1 billion in 10-year Treasuries and $2.7 billion in 30-year Treasuries and buying $3.9 billion worth of two-year Treasuries.

Hedge fund diversification remains elusive

The BAML team reported that correlation between diversified hedge fund performance and the S&P 500 price return fell again from the high reached in May 2016, indicating just how elusive hedge fund diversification is. They explained that when the S&P 500 falls, hedge funds that are more positively correlated with the index are expected to take a hit in terms of performance.

This doesn’t mean that all strategies result in poor hedge fund diversification, however. Xiong and team highlighted the Short Bias and Merger Arbitrage strategies as having negative correlation with the S&P 500 and thus offering better hedge fund diversification than other strategies.

Credit hedge fund strategies led the way in 2016

The BAML team added that the diversified hedge fund index’s flash return grew 3.34% in 2016, marking a meaningful underperformance versus the S&P 500, which grew 9.4% during the year.

They reported that credit-related hedge fund strategies did better than others, particularly Distressed Credit, Convertible Arbitrage and Event-Driven funds.

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hedge fund diversification

However, the Dedicated Short-Bias strategy dipped 5.1% during the year.