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Alternative Market Briefing

The benefits of convergence and divergence in a diversified hedge fund portfolio

Monday, August 12, 2013

amb
Andrew Fisch
Benedicte Gravrand, Opalesque Geneva:

What exactly is a convergence-divergence strategy? Andrew Fisch, Co-CIO at SSARIS Advisors, LLC explains it to Sona Blessing on Opalesque Radio. Based in Wilton, CT, SSARIS is a manager of absolute return hedge fund and hedge fund of fund strategies.

Sub-strategies in funds of funds, as we saw in the last few years, tend to correlate to one another during times of crisis, despite the managers’ best efforts to reach diversification. But those who use convergence and divergence strategies strategically can avoid this correlation problem.

Convergence and divergence are two styles of investing, Fisch states; "in periods of stress, convergence strategies and divergence strategies tend to be negatively correlated to each other, so one offsets the risks of the other, providing capital preservation under stressful environments."

Convergence strategies rely on normal market behaviour, he explains, i.e. markets that are liquid and rational. One example is the market neutral strategy.

Such strategies often require leverage to inflate returns that are normally small. However, "convergence strategies, especially when run with large leverage, when markets become disrupted… they experience these tail events as part of their cycle." At SSARIS, the managers assume that in every cycl......................

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