Building a diverse portfolio helps to navigate the rise and falls of capital markets. Investors may increasingly consider the active risk management that hedge funds can provide. A hedge fund is considered an alternative asset class that invests in a variety of actively managed strategies. These strategies often involve sophisticated techniques to control risk exposure and generate investment returns.
Hedge funds typically seek to diversify equity, credit and interest rate risks that come from traditional asset allocation policies. Hedge funds could provide exposure to non-traditional return drivers and play an important role in achieving a well-diversified portfolio. By introducing new return drivers, the total portfolio relies less on the direction of capital markets.
While many investors remain attracted to the potential diversification, return enhancement, and low exposure to markets that hedge funds seek to provide, it is important for investors to understand how such aims are accomplished.