Investing in hedge funds
Investing in hedge funds can provide an important source of diversification from both a risk and return perspective.
Hedge funds are actively managed investment pools in which managers use a wide range of strategies, providing diversification relative to both equity and interest rate risk with minimal give-up in return. Hedge funds are not an asset class on their own. They are funds invested in listed equity, listed bonds, private markets, and commodities, meaning grouping them together is inappropriate when trying to build them into your portfolio.
We refer to hedge funds as ‘diversifying alternatives’, a term we believe encapsulates what these kinds of funds are designed to add an important element of diversification to your portfolio through a variety of different strategies. Essentially, these strategies give you a risk-controlled exposure to non-traditional sources of return. We believe an optimum alternatives allocation should include a long-term strategic allocation to unconstrained hedge funds that is matched to your organization’s needs and objectives.
Potential benefits of hedge fund investing
-
DiversificationHedge funds can provide your portfolio with alternative sources of return and different risk exposures by accessing asset classes in unconventional ways, such as shorting, and greater use of derivatives and leverage.
-
Asymmetry or convexitySome hedge fund strategies are designed to capture positive returns in all market environments. You may have heard these strategies called ‘absolute return’.
-
A high-quality return profileHedge fund strategies can carry high risks, but they are usually designed to target a return that compensates for this in as efficient a way as possible.
Managing a hedge fund allocation: What is the recipe for success?
Hedge fund strategies and approaches
Hedge funds can give you access to alternative risk exposures alongside your more traditional allocations to equities, real estate and bonds. Hedge funds take alternative approaches to these and other asset classes to find new sources of returns that seek a premium over other asset classes by taking different types of risk.
Asset managers of these strategies can use a wide range of investment approaches to generate these differentiated returns, as well as minimizing the impact of broader capital markets. This means hedge fund managers can use tools and methods not usually employed by more traditional managers:
-
ShortingThis allows asset managers to seek profit from an asset or security falling in price by selling a stock then later buying it back at a lower price. Asset managers often pair up securities in an effort to profit from one improving and the other declining.
-
LeverageAsset managers can borrow money from banks to expand the size of their portfolio and potentially enhance their returns. This approach can also magnify any losses.
-
DerivativesFinancial instruments such as equity futures or collateralized loan obligations give asset managers access to differentiated sources of risk and return.
-
Private investmentsAsset managers often have the ability to access non-listed assets, substantially broadening their potential investment universe.
-
Increased concentrationPortfolios often consist of as few as 10-15 investments, magnifying the impact of each one on the overall strategy’s performance.
Hedge funds: The comeback kid?
Before accessing this website you must read and accept the following terms and legal notices.
You are about to enter a website intended for sophisticated, institutional investors based in Singapore and the information contained herein is only intended for Accredited and Institutional investors as defined in Section 4A of the Securities and Futures Act, 2001 of Singapore. Any person unable to accept these terms and conditions should not proceed any further.
In Singapore, Mercers Outsourced Chief Investment Officer, Delegated Solutions and other Investment Services delivered through Mercer Funds are delivered by Mercer Investment Solutions (Singapore) Pte. Ltd. (“MISS”) authorised and regulated by the Monetary Authority of Singapore. MISS holds a Capital Markets Services Licence for Fund Management and Dealing in Capital Markets Products (Collective Investment Schemes) under the Securities and Futures Act 2001 of Singapore and is exempt from the requirement to hold a financial adviser’s licence to act as a financial adviser in Singapore.
Information about Mercer strategies and solutions is provided for informational purposes only and does not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities, or an offer, invitation or solicitation of any specific products or the investment management services of Mercer, or an offer or invitation to enter into any portfolio management mandate with Mercer. None of the content on Mercer.Com should be considered as advice. No actions should be taken based on this content without first obtaining professional advice. Mercer makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. Past performance does not guarantee future results. The value of investments can go down as well as up, so you could get back less than you invest.
Mercer reserves the right to suspend or withdraw access to any page(s) included on this Website without notice at any time and accepts no liability if, for any reason, these pages are unavailable at any time or for any period. The solutions, products and services described in these pages are not available in all jurisdictions.