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This article was authored by Koray Yesildag, Asset Allocation Specialist in the London Global Asset Allocation Team of Aon Hewitt.

Hedge funds have been a hot topic for institutional investors over the past few years, with some increasing their allocations to this alternative asset class as a way to diversify away from the more traditional sources of returns, while others have stayed away, citing complexity, the wide range of different strategies and difficulty in determining what is driving returns. The challenge for consultants is to make these impenetrable looking investment strategies much more accessible and easy to understand to those that are either invested or considering investing in hedge funds.

One way to do this is to provide a clear understanding of how various types of hedge fund strategies tend to perform in different market environments. For example, it is useful to know which types of hedge fund perform best when the economy is slowing, interest rates are falling and general volatility is high. The assumption is that, as the expected returns from competing asset classes like equities and bonds decline, the case for non-directional hedge fund strategies becomes progressively more compelling. The Aon Hewitt Global Asset Allocation and Hedge Fund specialists have embarked on a project to analyse these macroeconomic drivers of hedge fund strategy returns and we think the results so far ......................

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