Hedge Funds as Diversifiers in Institutional Portfolios (Commonfund)

January 2014

KEYWORDS: Institutional Investors, hedge fund investor, portfolio diversification, Hedge Fund Regulation, alpha, risk management, Volatility, absolute return



  • Commonfund

In the not too distant past, hedge funds were often considered mysterious, exotic, and elusive investment vehicles that revealed little about their methods of generating return. As the industry has matured and standards of transparency have evolved, that perception seems to have mostly faded. Meanwhile, other broad tags of disapproval, such as that hedge funds are expensive, glorified indexers – in essence, the opposite of exotic and mysterious – have more recently taken their place. While these extremes reflect some degree of hyperbole, they also reflect legitimate concerns and important considerations for hedge fund investors: avoid investments that are inaccessible and not able to be understood; avoid constructing a hedge fund allocation that is redundant and inefficient in a portfolio. But for most, the reality of hedge fund investing is very much in-between: the inaccessibility and mysteriousness of hedge funds is often overstated, and their value as diversifiers is often understated.

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