Institutional investors are increasingly viewing hedge funds as substitutes for traditional investments in bonds and equities, according to a new paper by the Alternative Investment Management Association (AIMA), the hedge fund industry group, in conjunction with the CAIA Association, an alternative investment education body.
The paper – “Portfolio Transformers: Examining the Role of Hedge Funds as Substitutes and Diversifiers in an Investor Portfolio” – said experienced investors into alternatives no longer viewed hedge funds as a standalone allocation to complement long-only strategies, but rather as an asset class that can help enable diversification.
The paper identified long/short equity, long/short credit, event-driven, fixed income arbitrage, convertible arbitrage and emerging markets as hedge fund strategies that could substitute traditional asset classes such as stocks and bonds. Meanwhile, the paper identified global macro, managed futures and equity market neutral as “diversifiers” as they are fairly uncorrelated to the underlying asset class. The research is based on a “cluster” analysis of the risk and return characteristics of the main hedge fund strategies.
“Pensions, endowments, foundations, insurers and family offices are different entities, with different challenges and divergent investment aims. But what many of them have in common is a wish to see hedge funds as another method of investing in equities, bonds and other asset classes, rather than as a separate asset class. This new thinking promises to transform the risk and return profiles of institutional investor portfolios,” said Jack Inglis, chief executive officer (CEO) at AIMA in London.
Capital inflows into hedge funds have increased dramatically as the asset class becomes increasingly institutionalized. The Credit Suisse Hedge Fund Capital Services Group survey of institutional investors published in March 2015 estimated there would be a 14.4% increase in hedge fund Assets under Management (AuM). This would push industry assets over $3 trillion, an industry record.
Institutions consider hedge funds over traditional investments
Institutional investors are increasingly viewing hedge funds as substitutes for traditional investments in bonds and equities, according to a new paper by the Alternative Investment Management Association (AIMA), the hedge fund industry group, in conjunction with the CAIA Association, an alternative investment education body.