Hedge fund diversity grows
25 November 2015 London
Image: Shutterstock
The virtue of hedge fund diversification has been highlighted in a new report by the Alternative Investment Management Associations (AIMA) and the Chartered Alternative Investment Analyst (CAIA) Association.
The Portfolio Transformers: Examining the Role of Hedge Funds as Substitutes and Diversifiers in an Investor Portfolio report outlines the specific qualities that different types of hedge funds offer to institutional investors, the main source of capital managed by the hedge fund industry today.
The report’s finding are based on a ‘cluster’ analysis of the risk and return characteristics of the main hedge fund investment strategies.
“Some of the most experienced investors in alternative investments no longer see hedge funds as a standalone allocation but rather as substitutes for investments in equities and bonds or as investments that bring particular diversification benefits,” according to AIMA.
The new analysis identifies ‘substitute’ strategies that could replace a long-only allocation to stocks, bonds and other asset classes as long/short equity, long/short credit, event-driven, fixed income arbitrage, convertible arbitrage and emerging markets.
‘Diversifier’ strategies—those that are particularly uncorrelated to the underlying asset class—include global macro, managed futures and equity market-neutral, according to the research.
Jack Inglis, CEO of AIMA, said: “This new paper underlines the heterogeneity of hedge funds today. For every type of fund, there are just as many solutions to investors’ particular requirements.”
“The paper also makes it clear that the old distinctions that have underpinned portfolio construction for the last 25 years are disappearing."
“Pensions, endowments, foundations, insurers and family offices are different entities, with different challenges and divergent investment aims. But what many of them have in common is a wish to see hedge funds as another method of investing in equities, bonds and other asset classes, rather than as a separate asset class.”
The Portfolio Transformers: Examining the Role of Hedge Funds as Substitutes and Diversifiers in an Investor Portfolio report outlines the specific qualities that different types of hedge funds offer to institutional investors, the main source of capital managed by the hedge fund industry today.
The report’s finding are based on a ‘cluster’ analysis of the risk and return characteristics of the main hedge fund investment strategies.
“Some of the most experienced investors in alternative investments no longer see hedge funds as a standalone allocation but rather as substitutes for investments in equities and bonds or as investments that bring particular diversification benefits,” according to AIMA.
The new analysis identifies ‘substitute’ strategies that could replace a long-only allocation to stocks, bonds and other asset classes as long/short equity, long/short credit, event-driven, fixed income arbitrage, convertible arbitrage and emerging markets.
‘Diversifier’ strategies—those that are particularly uncorrelated to the underlying asset class—include global macro, managed futures and equity market-neutral, according to the research.
Jack Inglis, CEO of AIMA, said: “This new paper underlines the heterogeneity of hedge funds today. For every type of fund, there are just as many solutions to investors’ particular requirements.”
“The paper also makes it clear that the old distinctions that have underpinned portfolio construction for the last 25 years are disappearing."
“Pensions, endowments, foundations, insurers and family offices are different entities, with different challenges and divergent investment aims. But what many of them have in common is a wish to see hedge funds as another method of investing in equities, bonds and other asset classes, rather than as a separate asset class.”
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