This is a sponsored article from Blackrock.
The alternative investments universe is expanding rapidly. A multitude of options and strategies are readily available as investors seek diversification and uncorrelated assets amid late-cycle market volatility.
The most direct pathway into the alternative investment universe is through public market strategies, specifically hedge funds and other investment vehicles that have the flexibility to employ unique trading strategies in both traditional and non-traditional markets to earn active return or alpha. Because of this versatility, public market strategies can complement traditional portfolios and can be an integral part of a client’s portfolio by offering diversification, uncorrelated returns, and potential risk mitigation.
Creating a truly efficient portfolio relies on bringing together investment solutions that respond to market events differently. Hedge funds can add meaningful diversification to a portfolio in the following ways:
● They have greater flexibility to use a wide range of securities, trading strategies and instruments with fewer restrictions on investment methodology. This allows greater potential to discover opportunities that are generally less correlated.
● They are less dependent on market movements, which can help to dampen portfolio volatility.
● They use trading strategies that seek out market inefficiencies, allowing highly skilled managers to add significant value over time. As a result, selecting the right manager is crucial.
Hedge funds have the potential to add significant value to an investor’s portfolio because they have historically provided strong risk-adjusted returns with low correlations to traditional investments. The horizon of hedge fund investment strategies has seen unprecedented expansion in recent years. Below is a description of some of the more common hedge fund strategies.
Fundamental long / short: involves buying and/or selling predominantly equity or credit securities believed to be significantly under-priced or over-priced by the market in relation to their potential value.
Relative value: seeks to profit from the mispricing of related financial instruments using quantitative and qualitative analysis to identify securities or spreads between securities that deviate from their fair value and/or historical norms.
Event-driven: focuses on companies that are, or may be, subject to corporate events such as restructurings, takeovers, mergers, liquidations, bankruptcies or other corporate activity.
Multi-strategy: maintains flexibility to invest in a variety of investment strategies at a given time to achieve positive returns regardless of overall market performance. They may have fixed allocations to set strategies, or vary their approaches depending on market developments.
These strategies can help to offer genuinely uncorrelated sources of return as well as broad diversification. They can also help control volatility, improve risk-adjusted returns, and historically have provided material and quantifiable downside protection to portfolios over the long-run1. The following charts illustrate how adding hedge funds to a 60/40 portfolio can help improve its risk/return profile2.
In the turbulent arena of emerging markets, complexity, volatility, and inherent idiosyncrasies create a fertile environment for active investing. Long/short strategies can be particularly effective in enabling investors to benefit from deviation in fundamental valuation.
The inefficiencies of emerging markets mean a long/short strategy, combined with deep fundamental research and skilled stock-picking, can identify mispricing and capture more alpha-rich investment opportunities. In essence, using the strategy in an emerging market setting can help to generate positive absolute return uncorrelated to broader equity markets, lower overall portfolio volatility and capture the growth potential of emerging markets while protecting against equity market downturns.
Access is critical in emerging markets and success depends heavily upon on-the-ground knowledge. A good asset manager with the support of a global presence and ingrained local connections has a powerful competitive advantage in identifying alpha opportunity in these complex, dynamic markets.
Manager selection is key
Alternative investments typically account for over 10% of wealth managers’ overall allocations. In fact, 79% of investors intend to maintain or increase their level of allocation to hedge funds over the next 12 months3. As geopolitical risks and stock market volatility continues to shake markets worldwide, the clamour for diversification and downside protection can only drive demand for the asset class higher.
Careful manager and strategy selection is crucial to benefit from the many advantages of investing in hedge funds. This is because the dispersion in hedge fund manager performance is so wide, which creates both opportunity and risk for an investor. Selecting the right managers may add significant value to a portfolio while poor manager selection could materially impair performance.
BlackRock has over 20 years of experience managing hedge fund strategies4. Our deep investment expertise, proven record of maximizing risk-adjusted returns, superior information and analytics, and access to differentiated investment opportunities are foundations that give investors a solid platform to find their way in hedge fund investing.
To revisit other articles on alternative investments, please click below:
Navigating investment opportunity as tide turns towards alternatives
Private credit: An alternative route to investment enhancement
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2 Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested. For illustrative purpose only. There is no guarantee that any forecast made will come to pass. Indices have no fees, are unmanaged, and are used for illustrative purposes only. Indices are not intended to be indicative of any fund’s performance. It is not possible to invest directly in an index. Source: eVestment: Equity: S&P 500 Index; Fixed Income: Barclays Global Aggregate; Hedge Funds: HFRI Fund Weighted Composite Index. Data is for time period: January 1994 to December 2017.
3 Source: Preqin: “Alternatives in 2019” report, as of December 2018. For illustrative purpose only. There is no guarantee that any forecast made will come to pass.
4 Source: BlackRock, as of April 2019.
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This material is provided by BlackRock and is intended solely for informational or educational purposes. This material and the information provided herein must not be relied upon as a forecast, research, investment or financial product advice and is not intended to be (in any manner) a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2019 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.
The information provided here is not intended to constitute financial, tax, legal or accounting advice. You should consult your own advisers on such matters. BlackRock does not guarantee the suitability or potential value of any particular investment. Investment involves risk including possible loss of principal. Past performance is not an indication for the future performance. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.
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This is a sponsored article from BlackRock.