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Alternative Market Briefing

Other Voices: Hedge funds manage risk: Opposing view

Tuesday, April 04, 2017

By: Richard H. Baker

Even in times of pressure, research shows that investors particularly institutional investors such as pensions, foundations and endowments continue to use hedge funds as tools to help meet their unique financial and risk management needs.

This is especially true in the U.S. According to independent data from Preqin, total industry assets are at record levels. Almost two-thirds of investors plan to maintain or increase their hedge fund allocations over the near term; over the longer term, nearly 70% of investors report the same.

So, why do these sophisticated investors continue to use hedge funds in the face of recent headwinds?

There are a variety of answers, but many institutional chief investment officers will tell you they rely on hedge funds to help dampen market volatility and provide returns that are risk-adjusted and uncorrelated to equity markets.

What that means in practice is that many hedge funds are designed to protect against losses when markets crash. An example would be the global financial crisis when hedge funds on average outperformed the U.S. stock market, which lost about 40% in 2008.

In other words, the goal is often more about managing risk than "beating the markets," as some critics suggest.

Of course, each investor and allocation is different, but the fact that the overwhelming majority of industry investors are sticking with hedge funds for the long term shows that they continue to see the value p......................

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