Including Hedge Funds and Managed Futures in Your Portfolio
During periods of poor performance of traditional asset classes, investors may be
prompted to look for ways of balancing their investment portfolios in an attempt
to improve performance in a variety of market conditions.
We believe that incorporating alternative investments, such as hedge funds and managed
futures, into your portfolio can help you achieve this balance.
Diversify with Hedge Funds and Managed Futures
Alternative investments can be characterized at least in part by their ability to
utilize a wide array of trading techniques, often (but not always) including selling
securities "short" and employing leverage. For these reasons and others, hedge funds
and managed futures have historically proven to have low correlation with the broader
market of stocks and bonds.
In the case of hedge funds, the SEC recently stated that hedge funds have been used
to diversify investments based on their historic low correlation with more traditional
equity and fixed income investments.¹ And in the case of managed futures, these
products exhibit similar historic correlation properties. In fact, many managed
futures programs have historically often been negatively correlated with equity
indices in months when equity returns have been negative, and positively correlated
when equity returns are positive.² Dr. John Lintner of Harvard University concluded
that "[t]he combined portfolios of stocks after including judicious investments
in managed futures accounts show substantially less risk, at every possible level
of expected return, than portfolios of stocks (or stocks and bonds) alone."³
Correlations are subject to change. There is no guarantee that the addition of alternative
investments to a portfolio will increase returns or avoid losses.
Styles and Strategies of Hegde Funds and Managed Futures
Even sophisticated investors who understand the potential benefits of diversifying
with alternative investments can feel overwhelmed when choosing which specific products
to incorporate into their portfolio. Within the broad category of alternative investments,
there is a wide array of different styles and strategies, and an even wider array
of managers and products. Identifying the full range of available choices is one
challenge, given the advertising and privacy restrictions applicable to much of
the alternative investment industry. But even with the choices identified, every
alternative investment needs to be evaluated individually as to its trading styles,
history, opportunities and risks. Proper product review through rigorous qualitative
and quantitative investigation is critical.
Learn More about Alternative
Investment Styles and Strategies
Frequently Asked Questions
We have complied three FAQs to help you learn more about the different types
of alternative investment products.
Frequently Asked Questions
about Alternative Investments
Frequently Asked Questions about Hedge
Funds
Frequently Asked Questions about
Managed Futures
1. "Implications of the Growth of Hedge Funds," the Securities and Exchange Commission, 2003.
2. Burak Cerrahoglu and Dulari Pancholi, "The Benefits of Managed Futures," Center
for International Securities and Derivatives Markets, March 2003.
3. Dr. John Lintner, "The Potential Role of Managed Futures Accounts in Portfolios
of Stocks and Bonds," 1983.