THE BENEFITS OF HEDGE FUNDS
Hedge funds have become a major part of the investment landscape with almost $1.5 trillion dollars under management. In this annual update, the return and risk characteristics of various hedge fund strategies are reviewed. Results show that correlations of traditional market factors with various hedge fund strategies often depend on the markets in which hedge fund managers trade. While hedge funds may provide return and risk opportunities (e.g. diversification) to portfolios comprised principally of traditional stock and bond investments, the extent of that diversification depends both on the properties of the portfolio as well as the hedge fund strategy itself. In addition, passive non-manager based, algorithmic models of hedge fund performances are available today which may be regarded as investible benchmarks for certain active manager based hedge fund strategies. Therefore, one can think of hedge fund returns as a combination of manager skill and an underlying return to the hedge fund strategy or investment style itself. Lastly, the stability of the return and risk parameters over time is analyzed as well as the performance of hedge funds in a variety of market conditions.