3 Ways To Use Hedge Funds in Your Portfolio
Hedge-fund type investments play a vital role in creating an investment portfolio that delivers attractive risk adjusted returns. Unfortunately, many investors will tend to overlook hedge funds when they build their portfolio and as such forgo the potential benefits of blending in even a small allocation in their portfolios.
Perhaps the most pronounced of these benefits is the diversification benefit that arises from investing in hedge funds which broadly speaking have low correlations to the traditional asset classes that make up the bulk of most investors portfolios. Hedge funds employ a wide variety of strategies and as such it can be difficult to make generalisations however by blending in hedge funds which employ market neutral, quantitative or arbitrage strategies you can gain exposure to assets that face very different risk factors than those faced by traditional portfolios. These different risk factors mean the correlation between the returns of these hedge funds investments and more traditional investment is relatively low or even negative which in turn lowers the overall risk of the portfolio (As measured by the standard deviation of the portfolio). With lower risk then comes a lower chance of permeant capital loss and a smoother investment ride.
Indeed the potential for hedge funds to lower overall risk is something that institutional funds managers have been exploiting for years with almost half (46%) of institutional investors indicating that they used hedge funds to dampen portfolio volatility according to a recent Prequin survey. However it is not just on the risk side of the equation that investors can benefit from hedge fund exposure – It is also on the returns side. Hedge funds with a geographic, sectoral or factor based focus are often able to generate alpha through superior stock selection. Over the long run this means returns are derived more so from stock-specific rather than broad based market factors which allows for outperformance vs the market. Hedge funds also allow investors to take full advantage of a capable fund manager as hedge funds can profit not only from winners (via long positions) but also from losers (via short positions) which can provide an additional source of potential alpha generation for investors. Hedge funds are also generally less constrained by investment liquidity or asset class and thus have access to a wider universe of investments. This larger investment menu once again opens up the potential for creating alpha particularly in situations where investors are offered a paid premium for smaller or less liquid investments.
Clearly then Hedge-funds can play a vital role enchasing both the risk and return profile of an investment portfolio If you think your portfolio could benefit from an exposure to hedge fund type strategies then why not consider one of the many Harbourside Capitals Managed Accounts which employ hedge-fund style strategies. For more information or to chat with an investment professional about blending hedge fund type investments into your portfolio contact us at firstname.lastname@example.org
Source – Wealth Management
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