Hedge Strategies May Offer More Than Bargained For

May 6, 2002 (PLANSPONSOR.com) - Hedge funds may not really offer the diversification advantages generally touted for the asset class, according to a new study.

In fact, while hedge fund managers frequently point to a low correlation with traditional investments like stocks, a joint academic study just published in the Journal of Alternative Investment says that hedge funds have a stronger correlation than widely believed – and one that is, in fact, higher for most hedge fund strategies when markets fall.

The report was prepared by Laurent Favre, a research analyst at Swiss bank UBS AG, and Jose-Antonio Galeano of the Swiss Banque Cantonale Vaudoise.  The paper studied returns of hedge funds and traditional asset classes via a benchmark index for a typical Swiss institutional investor from January 1990 to June 1999, according to Reuters. 

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Fall Further?

Worse, the authors of the study say that certain strategies- such as equity non-hedge, event-driven and merger arbitrage are dangerously exposed when markets fall sharply, which can cause those investments to fall even more than the overall market.  That risk was high for equity non-hedge strategies that are predominantly long on equities and event-driven strategies that include distressed funds that bet on bankruptcies, according to the study.

Its authors argued that most hedge funds not only fail to provide the diversification benefits as advertised, but that investors also face a much greater risk of catastrophic loss in some hedge strategies than in other traditional investments.  In fact, the paper said four out of the 11 hedge fund strategies it studied were more exposed in a market downturn – but offered no upside potential compared to traditional markets in an upturn.

Except for global macro, market neutral, short-selling and CTA which invests in commodity and financial futures, the study said almost all other hedge fund strategies carried a risk of producing ‘extreme’ results.

 

SURVEY SAYS: Advice

May 17, 2001 - Yesterday we noted the dilemma of plan sponsors and providers alike -- why don't participants -- at least large numbers of them -- take advantage of investment advice? Realizing that the reasons can be as diverse as the individual participants themselves, our readers were --as usual --most generous in the response.

Nearly 22% chose a category we didn’t even offer (and we provided EIGHT), which we have summed up as either too lazy and/or not enough time to plan for retirement. Granted, those can be very different motivations, but overall the sense was that individual participants are not making –or taking — the time to attend to this very important area.

A close second opinion (19%) suggested that participants don’t know HOW to use online investment advice. However, we should also note that an number of readers suggested that this was not because they hadn’t been shown how — in some cases multiple times.

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Just behind was 18% who felt that when it comes to investment advice, people were typically going to be more comfortable dealing with people –people they trusted, rather than relying on online tools.

A surprisingly large 14.5% opined that participants weren’t using advice because they didn’t know they had access to advice, and more than 10% said that participants really didn’t have access to advice, either because their employer didn’t offer it, or because the participant lacked convenient access to the Internet.

Nearly 8% said the cost was too high, 5% said it was because participants didn’t think they needed advice and the remaining (roughly 4%) said that participants had been paralyzed with too many choices (another “original” option).

EDITOR’S NOTE: Each week we are treated to a large number of thoughtful, insightful — and occasionally entertaining –responses. We try to share some of these with you most weeks, but this meager space wouldn’t begin to provide a true sense of this week’s contributions. But, thanks to the Web, we are able to post a large number of those responses for your enjoyment and enlightenment (unattributed to protect the “innocent”). You can check them out at http://www.plansponsor.com/content/magazine/may2001advicesurvey .

You’ll no doubt be happy to know that the cover story in the May issue of PLAN SPONSOR, “Filling the Seats”, focuses exactly on the issue of participant advice. You’ll want to check it out at http://www.plansponsor.com/content/magazine/FillingTheSeats–not to mention the rest of the magazine and a series of items you’ll find ONLY on the web at http://www.plansponsor.com/content/magazine/mayissue .

Thanks again to all who participated in our survey –if today’s survey or the postings inspire you, drop us a note at editors@plansponsor.com

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