Clair Barber
HEDGE FUND DATA 11/10/2021

The (un) balanced portfolio – were hedge funds there to protect investors in September?

Clair Barber Head of Client Services, Marketing and Communications

In October last year, Kevin Gundle, Aurum Research Limited’s CEO, warned investors of the risks of relying on the traditional 60/40 portfolio whether adding alternatives – specifically hedge funds – to their portfolios might protect them. You can read Kevin’s original piece here.

A typical 60/40 portfolio (containing US equities and government bonds) fell sharply in September after losses in the two major asset classes. Recent headlines like ‘Traditional 60/40 portfolio has actually reached its expiration date’1 and ‘Investors suffer 60/40 blues as investment mainstay takes a hit’2 illustrate the risks Kevin warned about.

Indeed, many hedge fund investors in multi-strategy, macro and arbitrage strategies are likely to have been protected from the worst of September’s volatile markets. However, when it comes to hedge fund investing, investors need to choose both strategies and managers with great care and due diligence.

At Aurum, we often highlight industry performance dispersion, and we know that the impact of strategy and manager selection is key. This was evidenced clearly in September, as investors in more beta-driven strategies, such as long biased, were left licking their wounds when the beta came back to bite in a month of equity market volatility.

Understanding the beta element of hedge fund strategy returns is as important for investors as dispersion. The charts below illustrate that strategies with higher long-term beta performed significantly worse in September.

When it comes to hedge fund investing there are no short cuts. Significant investment and operational due diligence work is required to achieve an optimal outcome when it comes to hedge fund selection.

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  1. https://www.cnbc.com/2021/09/02/traditional-60/40-portfolio-has-actually-reached-its-expiration-date.html
  2. https://www.ft.com/content/ea04e3c1-4105-4411-b0ac-33449d1f3511?dm_i=2LZ3,1SNE3,6IVMHD,675N5,1