Despite recent high-profile exits from hedge funds, public pension funds are expected to be the main driver of growth in the alternatives space. The combination of misinformation and controversy around hedge funds and their managers has fueled the misperception of the role of a hedge fund allocation in an investor’s portfolio.
Hedge funds are often viewed by institutional investors as either a risky investment or an asset class intended to consistently outperform broad market indices. Neither of these perceptions are universally accurate. When alternative investments are implemented properly as a complement to long-only assets, or custom-built as a “surrogate” for these strategies, a hedge fund allocation can provide risk/adjusted alpha versus equities or a moderate fixed income like return, helping institutions to reduce their volatility and enhance returns over time.
Risk parity strategies attempt to balance risk and reduce portfolio volatility through the strategic use of leverage. The concept seeks to balance risk exposures more evenly than in a typical institutional portfolio; in particular by reducing a portfolio’s typical overweight to equities and increasing exposure to other assets, such as fixed income. Risk parity through the use of leverage, attempts to increase effective exposure to lower volatility assets classes and to achieve a desired overall expected portfolio return.
The current interest rate environment is a cause for concern for investors accustomed to the low volatility and consistent positive returns bonds have provided over the past 30 years. As interest rates begin to normalize and the impact of Fed tapering continues, alternatives to a core fixed income allocation should be considered. Click here for the article.
The combination of misinformation and controversy around hedge funds and their managers has fueled the misperception of the role of a hedge fund allocation in an investor’s portfolio. This paper identifies the benefits and drawbacks of individual hedge fund investments by strategy, and seeks to clarify how hedge fund strategies such as long/short equity, macro and relative value behave in different market environments.