There is a lot of stock market wisdom about the advantages of a broad diversification of assets. Dr Thomas Neukirch has analysed whether this also applies to hedge funds, which invest in assets such as equities, bonds, credit markets or commodity contracts and pursue very different investment objectives.

The Head of Strategic Asset Allocation and Hedge Funds at HQ Trust calculated how the addition of hedge funds would have affected a portfolio with low volatility asset classes – Global Bonds, US Government Bonds and Money Market. In a second step, Dr Thomas Neukirch added equities and gold. The analysis covers the period from the beginning of 1994 to the end of 2022.

– “Rising returns, falling volatility: hedge funds have historically proven to be a good diversifier in the context of liquid asset classes.”

– “Looking at low volatility asset classes, the addition of hedge funds to an equally weighted portfolio of global bonds, US government bonds and money market caused an improvement in volatility and return.”

– “Annualised return increased from 3.9% to 4.8% for the hedge fund variant, which was also equally weighted. At the same time, volatility decreased from 5.0% to 4.5%.”

– “Looking at a portfolio that included gold and global equities in equal proportions alongside hedge funds, global bonds, US government bonds and money market, the message is similar.”

– “Over the long term, this portfolio returned an average of 5.7% p.a. with volatility of 5.8% p.a. Without hedge funds, the portfolio would have returned only 5.3% p.a. with the same volatility risk.”

What investors should know about hedge funds:

– “The term hedge fund is a collective term for investment funds that invest in a wide variety of ways in mostly liquid investments such as stocks, bonds, credit markets or commodity contracts.”

– “Hedge funds can pursue very different investment objectives: Many funds aim to generate returns independent of the capital markets. Other funds take an activist approach, seeking to generate excess returns over equities with equity market-like risk.”

– “At HQ Trust, hedge funds are mainly used as a complement to fixed income investments and for diversification.”

– “Hedge funds are therefore particularly interesting for investors who have relatively high bond ratios and are looking for alternatives to them, as well as for investors for whom a reduction in portfolio fluctuations is important.”

– “Building a hedge fund portfolio requires many years of experience due to the complexity of the asset class.”