September 23, 2010
Hedge funds always seem to make front page news when something goes wrong in the financial markets. It’s along the lines of, “Who you gonna call?” But, it is more accurately, “Who you gonna blame?”
In the recent edition of Pensions & Investments (P&I), hedge fund performance was reviewed in the magazine’s “first-ever analysis of hedge fund performance” of the largest pensions. The numbers tell quite a different story than what seems to be coming out of Washington. As public pension plans and other large global institutional investors continue to allocate capital to hedge funds, it’s time for the media and politicians to drop the adjectives, tone down the rhetoric and recognize that hedge funds have become mainstream investments for accredited and qualified investors.
With all of this information available, are hedge funds really “secretive” too? Please click on link below.
In the early years of hedge funds, names such as Soros, Steinhardt, and Robertson developed successful hedge fund investment strategies while the fledgling industry was truly secretive and supported by the rich. In the 1990’s, the hedge fund industry started to democratize as databases and institutional marketing developed along with building systems for risk management and control. Early adopters of hedge funds in this period were high net worth investors and family offices and foundations and endowments that were looking to enhance overall performance and reduce volatility in the portfolio. Early on investors wanted to have access to strategies that could only be accessed through hedge funds: shorting, convertible arbitrage, merger arbitrage, commodities, and distressed investing to mention a few.
After the market meltdown of 2000, long only equity investors suffered the pain for two years and starting looking at new options. Mandated by the boards of directors or trustees, many large institutional investors, either directly or through their investment consultants, started to look for alternatives to traditional investing. Hedge funds demonstrated superior performance in the early years of the new century when the equity markets were in a state of freefall. Pensions and non profits turned to hedge funds to seek opportunities to diversify some of the portfolio holdings and to achieve positive results in market downdrafts.
And so, the behemoth organizations started to trudge into the new world: either directly or indirectly through hedge funds or hedge fund of funds in 2002-2003.
Over the past two years, and after the 2008 market meltdown, institutional investors have started to understand the benefit and risk/reward profile of hedge funds.
Take a look at the P&I article. Look at the results. Look at who is investing and why. For investors with in house investment capability or specialized consultants, many invest directly in hedge funds. For institutions that have chosen to not develop or build out a dedicated research effort, they allocate investment funds either through diversified hedge funds of funds or niche hedge funds of funds.
Because many state public employee retirement systems are facing shortfalls today, employee retirement systems and other investors have been reducing investment return assumptions. At the same time, adding hedge funds to the overall mix has lowered portfolio volatility and added consistent performance returns. As discussed in my book, Fund of Funds Investing: A Roadmap to Portfolio Diversification, hedge funds really work. They have, are, and will likely remain an important part of a diversified portfolio. Please click on the link for book.
Hedge funds are not for everyone. And while information about hedge funds may not be as easy to come by as other traditional investment data, pension allocators will agree that searching out the alpha is well worth the effort.