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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Many allocators are asking questions about whether fixed income can continue to reliably perform certain roles in multi-asset portfolios, including those commonly played by interest-rate and credit-spread allocations. In some cases, they are turning to hedge funds as a partial substitute for traditional fixed income allocations.
A common solution has been to build a multi-manager hedge fund portfolio with bond-like volatility and minimal correlation to equities. But we see pitfalls in this approach. For example, volatility and correlation levels are often conditional on the market regime, and therefore unstable and unreliable when targeting a specific outcome. In addition, allocators constructing such a portfolio often focus on how to weight various categories of hedge fund strategies (e.g., Macro and Relative Value) in order to navigate certain market environments. But we have found that the behavioral profiles of hedge fund categories have been more similar than not in recent years, suggesting that a portfolio structured in this way may be less diversified than it appears.
We propose an alternative approach for analyzing hedge funds and constructing multi-manager hedge fund portfolios intended to stand in for fixed income. As factor-based manager researchers and allocators, we believe a style-factor lens can help allocators understand the biases of their managers and define the desired roles of their investments. In our research, we have used that lens to help capture the roles of a fixed income allocation and build portfolios of hedge funds that are more connected to those roles and the desired outcome. Among our key conclusions:
Read more about our research in our new paper, “Can hedge funds behave if fixed income doesn’t? A manager-selection view.”
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