Portfolio diversification and hedge fund investments
Most institutional investors use allocation in hedge funds to improve their performance or risk. However, investing in hedge funds with a large equity exposure does not necessarily provide the desired diversification during an equity market crisis. Figure 1 shows that historical six-year correlation between the CS Tremont Index and MSCI World is around 50%. One way to overcome this difficulty is to select hedge funds with a low correlation to equities, and to monitor the portfolio over time.