Benefits of Leveraging Diversified Hedge Funds in Portfolio

A well-constructed hedge fund exposure can provide resilience and diversification to a client's portfolio through a varied collection of alternative risks and a disciplined risk-management methodology.

FREMONT, CA: Financial advisers seeking exposure to hedge funds need to be methodical, disciplined, and capable of comparing the risks and rewards offered by various hedge fund models. Hedge funds, to start, are a collection of investing methods used across a wide range of markets and assets utilizing several techniques rather than an asset class. Hedge fund strategies can play a variety of functions within a portfolio due to their unrestricted nature and wide range of risk profiles compared to their contemporaries in the mutual fund industry.

It's critical to realize that hedge funds are intricate, speculative, and risky investing instruments that are inappropriate for all investors. Hedge funds may provide three advantages: diversity, asymmetry, and quality return. A risk/return profile that could otherwise be absent from a portfolio can be delivered by combining asset classes, instruments, financing, risk factors, and portfolio levers with successful implementation.

Unrestricted toolbox

A smart portfolio manager may tailor individual positions' risk and reward and the portfolio's overall risk and reward using an unrestricted toolkit and harvesting alternative premiums. Event risk, complexity and liquidity premiums, arbitrage, distressed securities, futures, macro-trends, and other factors are alternate sources of return. Short selling, aggressive hedging, leverage, concentration, activism, and litigation may all be included in the unrestricted toolbox.

Diversification

Equity beta and interest rate risk are the two systemic risks that dominate traditional portfolios. On the other hand, hedge funds have access to a wider range of investment options and are well-equipped to take positions in both financial and non-financial (commodity) markets. These options aim to benefit an existing portfolio through diversification. After considering beta exposure to a combined portfolio, hedge funds typically produce annualized alpha, net of costs. When a portfolio manager manages the client's funds, they try to diversify the funds to reduce the risk factor.

Asymmetry

Hedge funds aim to achieve a specific degree of positive asymmetry to reduce the volatility of portfolio returns. In asymmetric investment, the likelihood of an increase in value outweighs a decrease. Successful managers can promote more constant compounding, which is essential for long-term portfolio growth.