April 26, 2017. By Mark Barry:

The market environment over the past several years has proved difficult for many hedge funds, with several high profile managers making headlines amid declining performance and the resulting loss of assets as investors seek to deploy capital elsewhere. Compounding this poor performance is the fact that hedge fund fees are relatively high compared to most other investment products, and investors are now much less willing to pay for mediocre returns. Despite this, hedge funds can play a valuable role in a well-designed portfolio, as many strategies offer a wider investment opportunity set and their inclusion has the potential to favorably alter the risk characteristics of the portfolio’s asset allocation.

Centerpoint incorporates hedge funds into certain customized strategies for high net worth clients and institutions, and our investment committee regularly conducts research on this space.  We recently discussed the performance of hedge funds and funds of hedge funds with Portfolio Manager Ben Bloomstone and Director of Investor Relations Kevin Hurd of Cross Shore Capital Management to hear their first-hand take on issues affecting the hedge fund industry and where they see opportunity for investors moving forward.  Our discussion specifically centered around long/short equity hedge funds as this is their area of expertise.  Their key points included:

  • Behavioral Bias Impacts Investing: Fear of losses often costs investors more in dollar terms than if they had stayed the course, however this is easier said than done.
  • Long/Short Funds Have Additional Tools: Compared to long only equity strategies, long/short equity hedge funds can take short positions, use leverage, derivatives, and can hold cash during periods of uncertainty.
  • Smaller Hedge Funds Have Advantages: Smaller hedge funds have historically outperformed their larger counterparts, with the potential to be more nimble and adjust portfolio exposures more quickly during times of volatility.

We encourage you to read their entire article “The Case for Investing in Smaller Long/Short Equity Hedge Funds via a Fund of Hedge Funds” to gain more insight into hedge fund strategies and potential benefits of investing in the space.*

*Please note that hedge funds are not appropriate for all investors and carry additional risks. Before investing, read a fund’s prospectus and related materials to make sure you understand the level of risk involved.