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Bailey McCann, Opalesque New York:

Hedge funds lackluster performance in recent years has cost them both clients and money. But for institutions with return targets, bailing on hedge funds is easier said than done. As a result, some institutions have changed how they allocate to hedge funds but without performance improvements, it will be hard for them to stay.

Antonis Mistras, managing director, alternative investments at DuPont Capital says hedge funds are at a crossroads. In a recent note, he argues now that central bank influence on markets is beginning to wane and volatility is returning to more normalized levels, hedge funds will have to prove that they can outperform.

The note includes an examination of hedge fund returns over the last five years which shows that hedge funds took less risk from 2014-18 and also saw their Sharpe ratios decline. 2014-18 was a period of relatively low volatility, and while low volatility isn't a negative return attribute in of itself, it can be an indicator of a poor opportunity set for tactical strategies. Many institutions, including DuPont Capital, pivoted to a portable alpha framework in the hopes of getting better returns from their hedge fund allocations even when market conditions weren't ripe for active management. Mistras says that portable alpha could work for other institutions that have been struggling with how best to manage their hedge fund exposure, but it won't fix everything.

"While the retur......................

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