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Alternative Market Briefing

Hedge funds add value to balanced portfolios but investment process and strategies are important

Tuesday, April 24, 2012

From Precy Dumlao, Opalesque Asia – In SEB Group’s latest report titled, "Hedge funds – avoiding a simplistic approach," the Nordic bank which describes itself as a relationship bank, has concluded that hedge funds add value to balanced portfolios. But it warned though that it is very important to include a process that identifies hedge funds with distinct targeted characteristics and to mix the strategies that suits the specific contest.

In the report, SEB has found that the hedge fund industry’s limited diversification was exposed at the height of the global financial crisis in 2008 at a crucial time when investors needed it most. Last year again tested investors’ patience as the industry was pummelled with performance challenges.

"The potential for alpha has been suppressed by more crowded markets and technological progress. This means selection is key – to either identify funds with better than average alpha or those offering superior diversification," SEB said.

In a balanced portfolio, hedge funds with average characteristics are not attractive even in an optimistic alpha scenario where the Sharpe ratio is elevated – as the correlations with other assets are too high, the report said and added, "On the other hand, diversifying strategies are attractive even in a conservative (no alpha) scenario, where they make up 4-8% of a balanced portfolio depending on risk profile (chart 2, where the re......................

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