With their proprietary strategies, agility, and diversification benefits, hedge funds bring various benefits to investment portfolios
Chief Investment Office 2 Mar 2022
- Hedge funds have distinguished themselves with fewer legal constraints & more flexible mandates
- Active management & exclusivity of funds made it the second largest alternatives investment class
- Main strategies include market neutral, event-driven, relative value, macro & specialist strategies
- Benefits include proprietary strategies, greater agility & diversification benefits
- Investors have to be aware of potential for large losses & high fees
Unique characteristics distinguishing hedge funds from traditional investment vehicles. Hedge funds are private investment vehicles that get their name from their historic focus on hedging risk by simultaneously taking long and short positions. While early fund managers mostly adopted a long- short equity strategy, today, hedge funds have evolved to adopt a myriad of strategies exploiting different market opportunities. The following characteristics distinguish hedge funds from other investment vehicles:
- Lower legal and regulatory constraints
- Flexible investment mandates
- Active management
- Exclusivity
Given their attractive features, hedge funds form the second largest alternative investment class, representing AUM of approximately USD4.3t globally with a CAGR of 10% over the past decade.
Choosing the right fund. Hedge funds vary widely in philosophy, strategy, and performance. It is important for investors to analyse the suitability of a hedge fund. Given the crucial role of fund managers in driving performance, investors would do well to familiarise themselves with the manager’s track record and expertise.
Of equal importance is understanding the fund’s investment objectives, risk and return profile, what it invests in, and how the investments are valued.
The benefits and drawbacks of hedge fund investing are often two sides of the same coin. By dedicating adequate resources to careful fund selection, investors can elevate their portfolios with the inclusion of the appropriate hedge fund exposure.