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Alternative Investments: Exploring Hedge Funds for Diversified Portfolios

Learn about nontraditional asset classes, hedge fund strategies, risks, and advantages for enhancing investment portfolios.

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Alternative Investments: Exploring Hedge Funds for Diversified Portfolios

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  1. Alternatives 201: Practical Applications

  2. Our Panel • Deborah Fields, Partner, KPMG LLC • Allison Mortensen, CFA, Senior Investment Manager, Aberdeen Asset Management Inc. • Jacqueline Rantanen, Principal in the Product Management Group, Hamilton Lane • Brian Vargo, Partner, Dechert, LLP

  3. Alternative Investments –A Nontraditional Asset Class Alternative Investment

  4. Types of Alternative Investments

  5. Common Characteristics of Alternative Investments Nontraditional Asset Class • Run by expert management • Major investors in the funds they manage • Paid both management and performance or incentive fees • Not publicly traded, however consider PTPs • Use leverage to enhance returns • Illiquid, however consider hedge funds • Provide limited transparency to investors, but improving • Difficult to value • May be unregistered

  6. What is a Hedge Fund? • The first hedge fund was launched in 1949 by Alfred Winslow Jones, a Harvard-educated editor at Fortune magazine • This was three years before Harry Markowitz published his first article on Modern Portfolio Theory, “Portfolio Selection” (Journal of Finance) • Jones formed the fund, which invested in what he perceived to be successful (long) and unsuccessful (short) stocks and strategies, in order to seek profits regardless of market direction • It was called a “hedge fund” because the original intent was to hedge against declines in certain stock prices • Today, hedge funds have become more varied in style; in some cases, they are misnamed, as they do not attempt to hedge market risk

  7. Why invest in Hedge Funds? Potential Advantages: • Ability to short • Lower correlation • Volatility Management • Less drawdown in down markets • Diversified return characteristics Risks: • Can change risk profile of portfolio • Lack of liquidity • Lack of transparency

  8. Hedge fund strategy classifications Source: Hedge Fund Research , October 2013

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