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.

Strategic intelligence

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.

Emerging challenges
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 find out more about hedge fund investing and how BlackRock can partner with you:
For Hong Kong readers, click here.
For Singapore readers, click here.

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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This is a sponsored article from BlackRock.