Products August 13, 2013

Hedge Funds Can Diversify a Portfolio

A white paper from the hedge fund strategies group of Commonfund shows how hedge funds can be effective diversifiers and balance equity risk in portfolios.
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Investors allocate to hedge funds for a range of reasons, but a primary role of the funds is diversifying broad market risk. The paper, “Hedge Funds as Diversifiers in Institutional Portfolios,” explores key factors driving the compelling value that hedge funds offer institutional investors.

Hedge funds are not a monolithic entity, nor a single and uniform investment class, the paper contends. They are highly diverse both among and within strategies.

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The growth of the hedge fund industry has led to an increase in the number of correlated managers, but it has also led to more uncorrelated managers. In fact, the single largest area of growth over time has been in the group of managers with the lowest percentage of their returns explained by those of the broad equity market. For a thoughtful, strategic investor, this diversity can provide the opportunity to attain portfolio diversification independent of market direction.

Hedge funds provide significant alpha. The long-term, alpha-based case for the funds remains strong, despite recent declines in alpha coinciding with unusually adverse market conditions for security selection generally. Although alpha is getting harder to find at the broad industry level, the best hedge funds still produce a substantial amount of alpha—and manager selection is critical.

In addition to significant alpha, hedge funds offer a diverse array of systematic or market exposures.

As an investment class, hedge funds have historically demonstrated the ability to generate superior, risk-adjusted returns to the broad market. The authors posit that even in periods when hedge funds underperform the broad market, they still provide measurable value to a portfolio because of their diversifying properties. After all, if completely confident in the direction of the market, an investor would not need hedge funds or any other source of diversification.

The white paper’s authors, all members of Commonfund’s hedge fund strategies group, are: Kristofer Kwait, managing director and head of hedge fund research; John Delano, director; and Justin Santana, director.

The white paper may be downloaded here.

The Markets August 12, 2013

ETFs Pull In More Than $42B in July

Exchange-traded fund (ETF) assets in the U.S. received more than $42 billion of inflows in the month of July.
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According to State Street Global Advisors’ most-recent “ETF Snapshot” report, this increased year-to-date inflows to $114 billion. The report, which now includes global data, shows Europe experienced inflows of $3.2 billion in July, increasing its year-to-date inflows to $7.1 billion. The Asia-Pacific region and Canada had minor outflows.

In terms of global performance by asset class, MSCI AC World IMI increased 4.9%, while MSCI EAFE gained 5.3%. Emerging markets returned 1%, while Emerging Markets Small Cap gained 0.3%. U.S. large-cap, mid-cap and small-cap markets were all positive, returning 5.1%, 6.2% and 6.8%, respectively. The Global Aggregate increased 1.3% and the Global Treasury Ex-U.S. added 1.9%. The U.S. high yield, U.S. aggregate and U.S. corporate bond markets were all positive in July. The U.S. REIT [real estate investment trust] market was up 0.8%. Commodities were positive, with the Dow Jones-UBS Commodity Index gaining 1.4% and gold jumping 10.3%.

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Global exchange-traded fund flows by asset class topped $45 billion in July. Equity had a leading $41.3 billion of inflows. The equity inflows were driven by the developed large-cap equity category, which had $18.8 billion in inflows. The Commodity asset class had outflows of $2.8 billion, most of which came from precious metals. Precious metals has $30.7 billion in outflows year to date.

The top three families in the global exchange-traded fund marketplace were BlackRock, State Street and Vanguard. Collectively, they account for approximately 71% of the global ETF market.

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