Hedge fund diversification benefit - styles matter

This table is from the latest research piece by Andy Lo and shows in a heat map the benefit of different hedge fund styles. The dedicated short bias has the lowest correlation relative to all of the other styles for the simple reason that most hedge fund states have a long bias. An investor is buying a different view. The next two styles that have the most diversification benefit are global macro and managed futures. These two should be the diversifiers of choice for any investor once the decision to hold alternative investments is made. 

A two step process may be an effective approach. First, determine whether you want diversifiers or substitutes and then second, choose the best managers within the style space. No different than the work on strategic asset allocation, the allocation decision may matter more than the manager selection.