IPE.com – Using hedge funds can halve the probability of extreme loss in a portfolio, according to a new study from Edhec Risk and Asset Management Research Centre.
Rather than consider hedge funds as a separate asset class, the study – The Benefits of Hedge Funds in Asset Liability Management — says they should be treated as a complementary management style to asset classes such as equities and bonds.
“In the past, hedge funds have been considered to give alpha benefits for asset managers,†says Peter O’Kelly, marketing manager, Edhec Risk and Asset Management Research Centre. “But their main benefit is to reduce risk by diversification, particularly since they are not correlated with other asset classes. So rather than look for absolute returns from hedge funds, managers should be thinking in terms of using them to diversify the portfolio and reduce volatility.â€Â
The study’s authors, Lionel Martellini and Volker Ziemann, say: “It is possible to construct diversification benchmarks that allow the risk related to holding stock or bond portfolios to be reduced in a very significant and robust way, by a) appropriately selecting the alternative strategies and b) optimising these with proven techniques.â€Â
