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Alternative Market Briefing

Other Voices: MPI cautions institutional investors not to rush for the 'Hexit’ without quantifying portfolio efficiency benefits

Tuesday, June 21, 2016

Institutional investors should undertake a quantitative analysis of their hedge fund investments’ long-term contribution to overall portfolio efficiency, rather than basing their asset allocation strategies on a short-term comparison with equity benchmarks.

This is the conclusion of a new research study – 'Hexit: Is Now the Time to Pull Out of Hedge Funds?’ – based on analysis conducted by MPI (Markov Processes International, Inc.), specialists in the analysis of systematic factors influencing investment performance, which provides analytics and reporting solutions to the financial services industry.

In response to the steady flow of announcements from large institutional investors scaling back or exiting their hedge fund investments – often citing under-performance against equities – MPI analyzed the contribution of hedge funds to broad-based portfolios over three time horizons.

By running established performance proxies through MPI’s asset allocation tool, the analysis found hedge funds, in general, still provide valuable diversification benefits and improve portfolio efficiency, even during periods of extended equity bull markets (2003-2016). Even though hedge fund allocations may not provide the same efficiency benefits over stock-and-bond portfolios in the current 2009-2016 bull run, they remain an effective performance stabilizer through turbulent periods.

"There has been a lot of attention paid to hedge fund fee structures and under-performance versu......................

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