A recent op-ed in FINalternatives argues that the success of hedge funds is more important than ever as the hedge fund assets are increasingly owned by institutional investors, who comprised 85% of fund allocations in 2012.
Tim Ng, Managing Director and Head of Research at Clearbrook Global Advisors, writes that hedge funds have been a misunderstood asset class due to “investors and advisors alike grouping hedge funds into a single melting pot.” He claims that it is of the utmost importance for institutional investors to identify the proper hedge fund strategy to meet their specific objectives in terms of risk, return, and liquidity.
According to the article, the primary determinants of hedge fund returns are equity exposure, volatility, and liquidity. The article is dominated by data illustrating the relationships between these factors and hedge fund returns over time, including comparisons with the S&P 500.
“The addition of hedge funds to a traditional long only equity and fixed income portfolio can reduce the downside variability of return, while increasing the probability of the institution meeting its annual return,” writes Ng, who recommends “upwards of a 20% allocation” to hedge funds to achieve this goal.”