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Hedge Funds Demystified: Their Potential Role in Institutional Portfolios
Summary
In recent years, hedge funds have become an increasingly prominent part of the lexicon of investing. The strategies and performance of hedge fund managers have gained wide attention. Yet, for many, hedge funds remain a mystery, even though hedge fund assets total more than $400 billion. How do they work? Do they merit consideration by institutional investors, who tend to be much less active in hedge funds than wealthy family groups and endowments?
In this report, we evaluate the potential benefits of including hedge funds in plan sponsors' portfolios. The types of hedge funds are described, and we introduce the term "Absolute Return Fund." The risk/return, correlation and other performance characteristics of hedge funds are analyzed, and we review considerations for selecting hedge fund managers, and constructing and monitoring hedge fund portfolios. We also provide a theoretical study that highlights the potential impact on risk-adjusted returns of allocating 10% of a pension plan portfolio to hedge funds.
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Hedge Funds Demystified: Their Potential Role in Institutional Portfolios
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