are hedge funds and managed futures included in the portfolio primarily for diversification or return enhancement? i feel it is for return enhancement… not sure though.
I think return enhancement.
Good for diversification because of return enhancement and low correlation with traditional assets like equity, fixed income and real estate.
Hedge funds returns have low correlation with equities? -->> isn’t that dependent upon the chosen strategy/style?
Pauluss Wrote: ------------------------------------------------------- > Hedge funds returns have low correlation with > equities? -->> isn’t that dependent upon the > chosen strategy/style? Yup, making it a case for good diversification. Do agree that it does not have low correlation with all strategies but some of them.
Fund of funds are more highly correlated with equity returns - may reduce diversification benefits…but they are also good “starter” investments, and are moreliquid, but carry higher costs.
Look at it from the long term perspective. Private equities/venture capitals operate in the world of equities and are thus affected by the same risk factors hence correlation is high over the long term. You may only be able to sell an IPO successfully when the market is booming. Hence private equities act as return enhancers to a portfolio of public equities because correlation is high and expected returns for private equity is higher than public equities. Gold and managed futures generally have lower returns compared to equity and bonds over the long term but they have very low correlations to equities, hence they will act as diversifiers. Hedge funds have varying strategies which may have a high or low correlation with traditional assets. The ones with high returns will provide return enhancement while the ones with low correlations will provide diversification. You can use your intuition to figure out the rest.
premium for low liquidity…return enhancement low correlation provide diversification benefit
HF’s for a quick canned answer would say both returns & diversification but true- dependent on strategy. PE returns, not a great diversifier RE diversification Commodities diversification i hope the AI set is not on crazy lease/storage calcs for commodities. anything more subjective i would like a lot more. thank you for listening CFA gods.
hedge fund provides good divisification effect for it has absolute benchmark , it can make money in bull market or bear I do not know why you do not look the textbook but rather like to ask question on website
Distressed Assets and Private Equity are more Return Enhancers rather than Diversifiers because they have high correlations with Stocks and Bonds.
Real estate and Commodities are diversifier, not much of return enhancers. PE: less of a diversifier but a long term return enhancer. HF, Managed futures and Distressed securities can be both.
Peterstepon Wrote: ------------------------------------------------------- > Distressed Assets and Private Equity are more > Return Enhancers rather than Diversifiers because > they have high correlations with Stocks and Bonds. Wrong. Distressed is dominated by firm specific (unsystematic) components. Largely isolated from systematic risk. Good diversifier, and empirically superior returns.
markCFAIL Wrote: ------------------------------------------------------- > Peterstepon Wrote: > -------------------------------------------------- > ----- > > Distressed Assets and Private Equity are more > > Return Enhancers rather than Diversifiers > because > > they have high correlations with Stocks and > Bonds. > > > Wrong. Distressed is dominated by firm specific > (unsystematic) components. Largely isolated from > systematic risk. Good diversifier, and > empirically superior returns. True, but the return distribution in return debt is negatively skewed. Contains large event risk, J-factor risk (not j curve, but risk in a judges’ decision).