Earlier today, Commonfund released a new white paper that examines the role of hedge funds in diversifying the portfolios of institutional investors. As noted online by Opalesque, “While investors allocate to hedge funds for a variety of reasons, one of the primary roles of hedge funds is to diversify broad market risk.”
The whitepaper lists four important factors that hedge funds offer institutional investors:
- Hedge funds are greatly diverse among and within strategies and not “a monolithic entity, nor a single and uniform investment class.”
- The single largest area of growth over time has been in the group of managers with the lowest percentage of their returns explained by those of the broad equity market. The report notes that this diversity can provide the opportunity to attain portfolio diversification independent of market direction.
- Hedge funds continue to provide alpha for investors. The long-term, alpha-based case for hedge funds remains strong, despite recent declines in alpha. As Opalesque notes, “the best hedge funds still produce a substantial amount of alpha.”
- Hedge funds also offer a diverse constellation of systematic or market exposures.
Hedge funds have historically been able to generate superior, risk-adjusted returns, providing investors with portfolio diversification, risk management, and lower volatility than the broader markets. Read more about this report online from Opalesque, or download the paper directly from Commonfund here.