Many investors remain unwilling to allocate assets to alternative investments at the best of times because of risk and control issues. Yet, in certain market conditions, alternative investments can prove very useful when employed to diversify an equity portfolio and the use of managed accounts1 can overcome many of these concerns
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.
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