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Hedge Funds as Diversifiers in Institutional Portfolios

Commonfund announced the release of the white paper, “Hedge Funds as Diversifiers in Institutional Portfolios” authored by members of its Hedge Fund Strategies Group, Kristofer Kwait, Managing Director, Head of Hedge Fund Research,  John Delano, Director, and Justin Santana, Director.

While investors allocate to hedge funds for a wide array of reasons, one of the primary roles of hedge funds is to diversify broad market risk. The authors explore four key factors driving the compelling value that hedge funds continue to offer institutional investors.

1.      Hedge funds are not a monolithic entity, nor a single and uniform investment class. They are highly diverse both among and within strategies.

2.      The growth of the hedge fund industry has led to an increased number of correlated
managers, but it has also led to an increased number of uncorrelated managers. In fact, 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 can provide the opportunity to attain portfolio diversification independent of market direction.
3.      Hedge funds provide significant alpha. 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. * Although alpha is getting harder to find at the broad industry level, the best hedge funds still produce a substantial amount of alpha – manager selection is critical.

4.      In addition to significant alpha, hedge funds also offer a diverse array of systematic or market exposures.

The white paper may be downloaded by clicking
<https://www.commonfund.org/InvestorResources/Publications/White%20Papers/2013%2008%20Hedge%20Funds%20as%20Diversifiers.pdf>here.

As an investment class, hedge funds have historically demonstrated the ability to generate
superior, risk-adjusted returns to the broad market. The authors posit that even in periods when hedge funds underperform the broad market, they still provide measurable value to a portfolio due to their diversifying properties.

After all, if completely confident in the direction of the market, an investor would not
need hedge funds or any other source of diversification.

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