Hedge Funds Rise to the Challenge

Although a small number of investors view hedge funds as too great a risk of pension fund investment, the majority understands that hedge funds are the only option for reducing risk while at the same time providing uncorrelated returns.

For example, Raphael Arndt, the Chief Investment Officer (CIO) of an Australian sovereign wealth fund has committed more than 15 percent of its $166 billion (Australian dollars) to hedge fund investment.

Mr. Arndt said in his speech last week to the Insurance Investment Forum, “Hedge funds have an important portfolio role to play in generating returns that are uncorrelated to equity markets.” The CIO wisely noted that hedge funds not only mitigate risk but also provide returns in equity market environments that are suffering prolonged periods of losses.

There Is No Conflict

The fund’s mandate is to achieve a 4 percent return after inflation. Arndt sees no conflict between the mandate and hedge fund investment. Rather, he cites the poor public image the industry has earned, the lack of transparency, excessive fees, and, the perceptions of poor ethics and a lack of customer focus as being the greatest obstacles to hedge fund investment.

This Makes It Clear

Although most would agree that these are dated hedge fund industry stereotypes, hedge fund managers would do well to take heed. Those close to the industry are well aware that today’s hedge fund industry is a newly evolved generation of hedge funds—hedge funds that practice institutional-quality investment processes.

However, those outside the industry are not so keenly aware of the strides hedge funds have made since the “great financial crisis.” Hedge fund managers must continue improving the industry’s public image, remain on a path toward transparency, persist in reducing fees and/or establishing performance based limits, and maintain a resolute focus on the needs of its investors.

It is clear that hedge funds can, and must, do these things.

What Today’s Institutional Investors Say

Most institutional investors agree that hedge fund investment is integral to portfolio diversification and an important element in protecting against a significant equity market drawdown. While investors are cognizant of the large fees hedge funds charge, they recognize the worth of skilled managers that command such fees. For these reasons, hedge funds are getting a second look.

What about Hedge Fund Jobs?

All this adds up to increased employment opportunities in the hedge fund industry. Logically, the more “new blood” hedge funds bring on board, the further they are distanced from the stereotypes of the past.

Investors have demonstrated a willingness to re-examine what hedge funds can offer. What they see is an evolved and improved industry that features a new breed of managers that diverge significantly from their predecessors.

As the old stereotypes fade, transparency improves, fees moderate and customer focus becomes the norm, hedge funds will see resurgence in popularity and jobs will inevitably follow.

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