Hedge Funds
The volatility of traditional investments in the current market environment has led to an increased awareness of hedge funds. While traditional investment vehicles focus on relative performance based upon a standard market index, hedge fund strategies seek to generate positive returns regardless of market direction.
The defining characteristics of hedge funds include diversification, low or non-correlation to market benchmarks, and sustainable risk-adjusted absolute returns. Because hedge fund returns are generally not dependent on the direction of the broad market, they tend to have a low correlation with both traditional benchmarks and different hedge fund sectors. The addition of a hedge fund strategy to a portfolio can therefore enhance diversification and reduce overall portfolio volatility. The chart below compares the risk and return trade-offs of traditional investments and hedge funds.
Diversification does not ensure a profit or protect against loss in a declining market
When considering alternative investments, including hedge funds, you should consider various risks including the fact the some alternative investment products: often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as other registered products, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager.
"Independence and advocacy have never been so important as an advisor. These two principles are what differentiate us in a commoditized industry."
-Bill Denney