Handbook of Hedge Funds

22

Introduction

I do not want a hedge fund manager to learn. At least, not with my money.

We now come to the fourth part of our book, which covers one of the most exciting and controversial topics of finance today: the analysis, selection and allocation to hedge fund investments. As of today, the primary form of individual and institutional investments is still composed of traditional assets such as stocks and bonds. However, during the past decade, interest in and financial commitments to alternative investments of all sorts have grown dramatically. Attracted by claims of superior risk-adjusted returns and low correlation to stock and bond markets, institutions and more recently affluent individuals have been allocating a small percentage of their portfolios to alternative investments, and more specifically to hedge funds. In parallel, the bulk of their assets remains invested in stocks, bonds, and other traditional securities. Both allocations are usually managed independently on a segregated basis. This gives rise to a number of interesting questions that we will examine in Chapter 23. First, what are the real benefits, if any, of including hedge funds in a traditional portfolio? Second, what is the optimal proportion of hedge funds in a portfolio? And third, how can one integrate traditional asset management with alternative investments? As we shall see, there are still lots of open questions, no single straightforward answer, and numerous common pitfalls that should be avoided. ...