MFA Blog

Hedge Funds Still Good Diversifiers for Institutional Portfolios, Commonfund Reports

Posted on January 9, 2014

Commonfund today released a white paper which found that hedge funds offer more diversification and better performance than mutual funds over time. The paper, authored by Verne O. Sedlacek, President and CEO of Commonfund, states that “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.  For a thoughtful, strategic investor, this diversity provides the opportunity to attain portfolio diversification independent of market direction.”

He continues, “Active management of long-only strategies will only bridge the gap faced by pensions, endowments and other institutions and that significant allocations to alternative strategies are necessary to preserve intergenerational equity and thus fulfill long-term missions and obligations of institutional investors.”

The paper states that, “The long term, alpha based case for hedge funds remains strong, despite recent declines in alpha coinciding with unusually adverse market conditions for security selection generally. In addition to significant alpha, hedge funds also offer a diverse array of systematic or market exposures.” Other findings in the report include:

  • Hedge funds continue to present a compelling value proposition to institutional investors as volatility dampeners, absolute return vehicles in certain cases, and as less-correlated sources of return.
  • As an investment class  hedge funds have historically demonstrated the ability to generate superior, risk-adjusted returns to the broad market.
  • Even in periods when hedge funds underperform the broad market they still provide measurable value to a portfolio.

“Regardless of the properties of the broad hedge fund index, for a very large number of constituent managers, the most dominant investment risk is not the direction of the S&P 500 index and while the growth of hedge funds may be associated with greater correlation with equities at an index-level, the ability to achieve diversification at the individual manager level has grown, not contracted.”  Read the full paper here.