Alternative Market Briefing

Paper: Rethinking Hedge Fund Allocation - An Integrated Approach for Institutional Investors

Monday, July 08, 2024

Matthias Knab, Opalesque for New Managers:

In today's challenging investment landscape, characterized by geopolitical tensions, elevated inflation, and market volatility, institutional investors are increasingly turning to hedge funds as a means of portfolio diversification and alpha generation.

A new paper by researchers from GIC and J.P. Morgan Asset Management proposes a comprehensive framework for hedge fund allocation that integrates top-down and bottom-up perspectives, offering valuable insights for investors seeking to optimize their hedge fund portfolios.

The Hedge Fund Value Proposition

The study confirms that hedge funds can deliver on three key attributes sought by investors:

Low correlation to equities

Resilience during equity market drawdowns

Alpha generation However, the authors emphasize that there is considerable variation among hedge funds, even within commonly used strategy classifications. This underscores the importance of a more nuanced approach to hedge fund categorization and allocation.

A Novel Categorization Approach

Rather than relying on traditional strategy labels, the paper proposes categorizing hedge funds into four distinct sub-groups based on their risk-return characteristics:

Loss Mitigation: Negative correlation to equities, positive performance during stress periods

Equity Diversifier: Low co......................

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