- Hedge funds are a substantial fraction of the asset management industry with around USD 4 trillion in size.
- Return expectations are less volatile vs. long-only investments. Hedge funds gain the highest popularity during periods of low equity market performance i.e. bear markets.
- Many hedge fund strategies target attractive returns regardless of the market environment thanks to their flexible investment style and hedging techniques.
- We like the diversification aspect of hedge funds and focus on strategies with a return outlook exceeding bond returns while showing limited correlation to traditional markets (i.e. equities).
Identifying the Absolute Return potential
Hedge funds are another well-known alternative asset class, which trade relatively liquid assets. They exist for many decades and have become a popular asset class with a substantial fraction of the asset management industry with a total AuM of around USD 4 trillion.
These funds employ sophisticated trading strategies and make extensive use of portfolio construction and risk management techniques to improve performance, such as short selling, leverage and derivatives. Different from traditional “long-only” investments, many hedge fund strategies have the goal to generate attractive returns regardless of whether markets are rising or falling (“absolute return”). Although hedge funds get widely considered to be risky investments, the expected returns of many hedge fund strategies are less volatile than those of traditional funds because of the use of hedging techniques or their differentiated trading style.
Hedge Funds - Low correlation
There exists an immense variety of strategies within the hedge fund world. Therefore, they can be very different from each other in respect of their investment focus, risks, volatility and expected return profile. We have a natural focus on hedge fund strategies within an efficient portfolio construction context with a return outlook that exceeds the return expectations for classic bond portfolios while showing limited correlation to traditional markets such as equities.
An equity long-short investor takes long positions in stocks that are expected to increase in value and short positions in stocks that are expected to decrease in value. Taking a “long position” in a stock simply means buying it: If the stock increases in value, you will make money. On the other hand, taking a short position in a stock means borrowing a stock you don’t own (usually from your broker), selling it, then if the stock declines in value, you make a gain as you can buy it back at a lower price than you paid for it and return the borrowed shares.