Low correlation to traditional assets provides a compelling case for hedge funds in the current market, according to Pimco.
With interest rates and capital appreciation diminishing the returns available in stocks and bonds, the low correlation of hedge funds could provide investors with value.
“Importantly for most investors, hedge funds have low correlation to other asset areas,” Pimco executive vice president and product manager alternatives Ryan Korinke told InvestorDaily.
“That is part of the reason why despite having a less favourable, forward looking outlook for traditional asset class returns, investors think alternatives and hedge funds will be able to capture something that those traditional asset classes can’t capture.
“I think investors have a feeling that as they move to alternatives, perhaps they’ll be able to make up some of those potential lower returns in the traditional asset classes – at least in the near term.”
Mr Korinke said that attitudes towards hedge fund strategies have changed since the global financial crisis (GFC).
He said that performance is no longer the benchmark of hedge fund strategies, as risk management operations have become a larger concern of investors.
“As we talk to investors around the world, some of the investors who had higher allocation to hedge funds during the GFC are the least interested in hedge funds now,” Mr Korinke said.
“Some of the investors who had lower allocations have a little bit more of a favourable outlook on hedge funds now and are looking to increase allocation.
“I think there is just more scrutiny on risk management operations and that’s sort of more and more looking at institutional firms that withstand a crisis and manage risk very well.”
While Mr Korinke said that hedge funds can provide attractive returns outside of traditional assets, he recommends investors provide their own due diligence.
He said that hedge fund styles differ, which impacts the likely return and risk for investors.
“They have to be careful to make sure they’re aware that not all hedge funds are created equal and not all managers are created equal,” he said.
“There are different areas where there are good opportunities and they’re not going to be related to what is going on in the rest of the portfolio.”
