Alternative investment covers a broad range of techniques. At the one end of the scale are relatively straightforward strategies aimed at buying and selling traditional instruments such as equities or bonds. At the other end are more complex techniques, which may include leverage and involve derivatives, commodities and currencies. Most often, these are operated by specialist investment managers and offered in the form of hedge funds.
Most hedge funds emphasise risk management and target absolute returns. Critical to their nature, is that hedge funds make capital preservation and consistency of returns their foremost goals, rather than the extent of performance. Hedge fund advantages include high, risk-adjusted returns, reduced volatility and diversification benefits deriving from low correlation with other investments.
History has shown that diversification of assets results in improved performance and reduced risk. Whilst the market offers clients more elaborate and sophisticated products, they are often accompanied with greater risk. Diversification does not always mitigate all the risk and research shows that hedge fund allocations can further reduce risk.
Integral to the nature of hedge funds is the ability to make money in all market conditions, provide stable returns and to avoid losses. Although fundamentally, markets are efficient over the long term, there are often period of mis-pricing, where opportunity beckons and swift action will be rewarded. On an absolute return basis, hedge funds have significantly out-performed the traditional asset classes of equities and bonds over the past decade. More importantly, these returns have been accompanied by reduced risk.