Benefits of Investing in Hedge Funds

Investing in hedge funds helps investors protect themselves from market volatility and downturns and generate reliable returns on fixed-income assets.

FREMONT, CA: Despite the complexity and speculative nature of hedge funds, there is no doubt that they are not suitable investment options for everyone, as they are illiquid and complex to invest in. A financial advisor who wishes to invest in hedge funds must have a disciplined approach to the investments, calculate the risks and returns for each hedge fund style and comprehend the investment strategies. As a result of a diversified collection of alternative risks and a disciplined approach to risk management, a well-constructed hedge fund exposure can help a client's portfolio to be resilient and diversified, increasing the portfolio's value.

Unconstrained Toolkit

Using an unconstrained toolkit allows a skilled manager to harvest alternative premiums. It is done while customizing individual positions, portfolio risk, and rewards across the board to extract additional returns. It is important to note that the unconstrained toolkit might include short selling, active hedging, leverage, concentration, activism, and litigation. Among the alternative sources of return that may be available to investors are event risk, complexity premiums and liquidity premiums, arbitrage, distressed securities, futures, macro trends, and so forth.

Diversification

Two systemic risks dominate traditional portfolios: equity beta risk and interest rate risk. On the other hand, hedge funds can access financial and non-financial markets (commodities) and are well equipped to take positions in a wide variety of investment opportunities that may not be available to traditional investor funds. Diversification of an existing portfolio is one of the objectives of these opportunities.

Asymmetry

By achieving a level of positive asymmetry in the portfolio returns, hedge funds can lower the volatility of their portfolio returns. An asymmetric investment has a higher probability of success on the upside than on the downside. In order to ensure long-term portfolio growth, managers who can reduce drawdowns can allow for more consistent compounding, which is critical to preventing portfolio declines.

Quality Return

Quality Return is the result of an efficient investment that compensates for the risks taken, as demonstrated by the Sharpe ratio, which can be used to measure this. Based on the Sharpe Ratio (a ratio that indicates the annualized return minus the risk-free rate divided by the standard deviation of return) was used as a measure of quality over the past years. Hedge funds can provide a return that is either equal or superior to the returns received by equities and the return generated by a 60/40 mix of bonds and equities. It is important to remember that there are many investment styles and approach choices and that past performance does not guarantee future success.