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Strategic Risk Management: A Practical Guide to Portfolio Risk Management by David Iverson

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CHAPTER 6

Hedge Funds

Hedge funds are actively managed investment funds that invest mainly in conventional asset classes and pursue a range of investment strategies and approaches not open to traditional active managers. Hedge fund managers often aim to achieve positive returns in all market conditions, and sometimes seek to preserve investors' capital. In contrast, traditional managers seek to outperform a well-defined, market-based benchmark. Hedge funds claim their returns depend on the return-generating skills of the managers and therefore justify the high fees charged.

NOT AN ASSET CLASS

Hedge funds should not be regarded as a distinct asset class. Rather, they should be regarded as alternative active management strategies in traditional asset classes. Some of the characteristics that distinguish them from asset classes are described next.

  • Hedge funds are a very diverse group, with a varied range of strategies with securities holdings that span many asset classes. There is little similarity among the hedge funds themselves.
  • Correlations among the hedge funds have little meaning when the funds themselves are not securities but products and the funds hold securities in other asset classes.
  • Hedge funds generally do not have readily available pricing, and holdings data are difficult to obtain. Many hedge funds closely guard information about their holdings, and their legal structures provide generous latitude regarding reporting conventions.
  • While the hedge fund asset base is ...

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