The Seven Advantages to Hedge Funds
1. Focus on Absolute Versus Relative Returns
Hedge Funds strive to meet 'absolute return' investment objectives as opposed to 'relative return' objectives, meaning hedge fund managers don't just focus on beating an index - they aim to deliver positive returns regardless of market direction.
Unlike mutual fund managers who are usually tied to a benchmark, thus limiting their potential returns, hedge fund managers have the freedom to generate returns from a variety of strategies, limited only by their risk controls.
2. Superior Performance With Lower Volatility
Historically, long/short equity funds have consistently delivered superior risk-adjusted returns with lower returns volatility than the returns of major stock market indexes.
Because of their ability to use leverage and short sell, hedge funds have a ddistinct advantage over long'-only mutual funds. They can increase their long exposire to the market to generate additional returns, or increase their short exposure when a more defensive stance is required. Because mutual funds are long-only strategies, they are fully exposed and at teh merce of the market - generating returns in market upswings as well as generating losses in market downswings.
Hedge Funds strive to meet 'absolute return' investment objectives as opposed to 'relative return' objectives, meaning hedge fund managers don't just focus on beating an index - they aim to deliver positive returns regardless of market direction.
Unlike mutual fund managers who are usually tied to a benchmark, thus limiting their potential returns, hedge fund managers have the freedom to generate returns from a variety of strategies, limited only by their risk controls.
2. Superior Performance With Lower Volatility
Historically, long/short equity funds have consistently delivered superior risk-adjusted returns with lower returns volatility than the returns of major stock market indexes.
Because of their ability to use leverage and short sell, hedge funds have a ddistinct advantage over long'-only mutual funds. They can increase their long exposire to the market to generate additional returns, or increase their short exposure when a more defensive stance is required. Because mutual funds are long-only strategies, they are fully exposed and at teh merce of the market - generating returns in market upswings as well as generating losses in market downswings.
3. Strong Performance In Up And Down Markets
Hedge Funds have demonstrated their ability to protect capital in down markets and provide equity-like returns when markets are rising.
4. Enhanced Diversification & Portfolio Efficiency
Due to their low correlation to traditional investments, hedge funds can also improve diversification and enhance a portfolio's efficiency. The benefit to the investor is increased return for the same or lower level of risk.
5. Limited Asset Size
Unlike mutual funds where the manager is motivated to maximize assets under administration, hedge funds typically become closed to new investors when they reach a predetermined asset level.
A reason for this capacity limit is that asset growth beyond certain levels is often detrimental to hedge funds using strategies that require nimble trading in order to react quickly to market events.
6. Incentive Based Compensation
Unlike the fee structures of traditional mutual funds that focus on asset-gathering, hedge fund fee structures reward managers for exceptional returns.
Hedge funds attract top-tier talent because the fee structure affords greater financial rewards and personal satisfaction to managers who consistently deliver superior performance.
7. Manager's Capital Committed
Hedge fund managers generally have significant amounts of their own capital invested alongside their clients, further ensuring everyone's interests are aligned.
This alignment of interests adds tremendously to credibility and speaks for itself in indicating where the manager's focus and best investment ideas will be directed.
Unlike mutual funds where the manager is motivated to maximize assets under administration, hedge funds typically become closed to new investors when they reach a predetermined asset level.
A reason for this capacity limit is that asset growth beyond certain levels is often detrimental to hedge funds using strategies that require nimble trading in order to react quickly to market events.
6. Incentive Based Compensation
Unlike the fee structures of traditional mutual funds that focus on asset-gathering, hedge fund fee structures reward managers for exceptional returns.
Hedge funds attract top-tier talent because the fee structure affords greater financial rewards and personal satisfaction to managers who consistently deliver superior performance.
7. Manager's Capital Committed
Hedge fund managers generally have significant amounts of their own capital invested alongside their clients, further ensuring everyone's interests are aligned.
This alignment of interests adds tremendously to credibility and speaks for itself in indicating where the manager's focus and best investment ideas will be directed.