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.”
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Can hedge funds play the role?
How should investors select the most suitable types of hedge funds for specific roles? Members of our Investment Strategy & Solutions Group offer a simple and intuitive framework that can help.
WellSaid: Partnering with climate founders
Wellington head of private climate Greg Wasserman discusses his team's approach to helping private companies progress along their growth journey
Venture capital outlook: Signals point to a brighter 2024
Our private investing team sees positive signals indicating that the recent downturn in venture capital may have hit bottom. Just as privates trailed the public market correction in 2022, we believe they will follow its recovery.
No more free lunch: Impact of higher interest rates on private equity strategies
We explain what the direct and indirect rate exposure of buyouts, venture capital, growth equity, secondaries, and fund-of-funds mean for investors.
Private market perspectives
Hear from private market experts across our early-stage venture, climate growth, late-stage biomedical, late-stage growth, private credit, and ESG teams.
Annual message from our CEO: At a crossroads
CEO Jean Hynes offers perspectives on the current macro and market environment, including the need to challenge long-held assumptions, prepare for persistent disruption, and consider the resulting investment opportunities and risks.
URL References
Related Insights
