Hedge funds manage risk: an Opposing view

Thomas Batcha |

This is a concise explanation of what institutions look for in Hedge Fund allocations and why they use them as part of core strategic process. *JB*

Even in times of pressure, research shows that investors — particularly institutional investors such as pensions, foundations and endowments — continue to use hedge funds as tools to help meet their unique financial and risk management needs.

This is especially true in the U.S. According to independent data from Preqin, total industry assets are at record levels. Almost two-thirds of investors plan to maintain or increase their hedge fund allocations over the near term; over the longer term, nearly 70% of investors report the same.

So, why do these sophisticated investors continue to use hedge funds in the face of recent headwinds?

There are a variety of answers, but many institutional chief investment officers will tell you they rely on hedge funds to help dampen market volatility and provide returns that are risk-adjusted and uncorrelated to equity markets.

What that means in practice is that many hedge funds are designed to protect against losses when markets crash. An example would be the global financial crisis when hedge funds on average outperformed the U.S. stock market, which lost about 40% in 2008.

In other words, the goal is often more about managing risk than “beating the markets,” as some critics suggest.

Of course, each investor and allocation is different, but the fact that the overwhelming majority of industry investors are sticking with hedge funds for the long term shows that they continue to see the value proposition these funds provide.

Beyond simply helping institutional investors meet their fiduciary needs, the industry also helps complement traditional sources of capital lending.

Whether providing capital to a start-up, or helping banks and other traditional financial institutions increase lending by taking debt off their balance sheets, hedge funds are playing an increasing, and important, role in fostering economic growth.

For all of these reasons, our industry is proud to stand with these investors as they work to protect their portfolios and achieve their unique and important goals.

source: Richard H. Baker, president and CEO of the Managed Funds Association.