The hedge fund industry on average does not hedge and the limited diversification of most hedge funds has been exposed, according to a report by SEB’s X-Asset team. And SEB believes that this type of ”naive” portfolio of hedge funds is likely to amplify cyclical swings of a balanced portfolio.
According to the report, those hedge funds looking for diversification can find it: equity market neutrals, macro and CTAs have all diversified macro risk in the past and offer an attractive mix for balanced portfolios.
SEB believes hedge funds add value to balanced portfolios but it is necessary to have a process that identifies hedge funds with targeted characteristics and to mix the strategies in a way that suits the investor profile.
Thomas Thygesen (pictured), Head, X-asset Strategies at SEB Merchant Banking, says: “Equity market neutrals, macro and CTAs are all attractive strategies for balanced portfolios even on conservative (no alpha) return assumptions, however the ideal mix of diversifying strategies will always vary depending on the investor profile.”
