What are they?
- Hedge Funds are pooled funds of alternative investments that employ different strategies to take advantage of certain identifiable market opportunities.
- Unlike traditional asset managers, Hedge Fund managers pursue absolute returns (as opposed to relative returns)
- Hedge Fund managers have greater flexibility and access to trade across underlying assets and asset classes, trading strategies and investment tools, thereby enabling them potential to capitalise on varying market conditions:
Usually structured as Limited Partnerships to enable this flexibility, to which limited transparency is a by-product of this approach.
Typically offer lower liquidity and charge higher fees than those charge by mutual funds.
Hedge Funds have demonstrated higher returns per unit of risk than most traditional asset classes.
- Ability to take short positions to capitalise on declining prices; or simultaneous short and long positions to exploit market inefficiencies through arbitrage strategies, and employ leverage to amplify returns.
- Access to structured derivatives: swaps, asset-linked instruments, hedging instruments
- Proprietary quantitative trading algorithms: systematic trading, machine learning and artificial intelligence.
Annualised returns and volatility of various asset classes: 2000-2016
*Real Estate is represented by an index of exchange –traded REITS, for which data dates back as far as March 2005.
Source: Trends Asset Management calculations using data provided by Bloomberg and EurekaHedge
How Hedge Funds can benefit your portfolio
- As a standalone asset class, hedge funds have historically demonstrated better risk-adjusted returns.
- Hedge funds can make both long and short directional bets. In other words, they can earn positive returns when traditional asset classes are experiencing price declines.
- This ability to earn returns with lower correlations to traditional assets make hedge funds an efficient addition to portfolios. In other words, this diversified portfolio will generate higher expected returns per unit of risk incurred (see ‘Efficient Frontier’ chart)