Hedge Funds – Opportunity in uncertainty
Large price swings are continuing
The recent economic downturn has had a substantial effect on economies and financial markets, highlighting the importance of a sound and robust investment strategy. Preparation for uncertainty offers investors breathing space to handle market shocks.
Large price changes can occur when news is very different from what was expected or when there is a high amount of uncertainty. Currently, a lot of news is unexpected because these are unique circumstances, and nobody knows how things will turn out. Also, events are highly interrelated so the impact of any piece of news is far reaching.
This means that large price swings will continue until there is more certainty on what will happen over the course of the economic crisis and when it will end.
Build investment portfolios that are more resilient to financial market shocks
Managing the risk in traditional asset classes and seeking out the differentiated returns in the non-traditional areas of the market can help build investment portfolios that are more resilient to financial market shocks.
Hedge funds can absorb the impact of financial market shocks
Hedge funds have greater flexibility in the investment strategies they can employ – either to enhance investment performance or to reduce risk.
Hedge fund allocation makes sense for the following reasons:
Risk – focus on downside protection, preventing the value of the investment from decreasing as much relative to other market-linked investments
Manager skill – deliver performance as a consequence of manager skill
Absolute return target – achieve performance returns in excess of cash
Diversification – lower dependence on traditional asset classes so that it is not affected as much by movements in traditional investments
Multi-strategy – greater flexibility in execution as their investment mandates are broader than traditional buy and sell investment strategies
But most hedge funds are not totally immune from global concerns, health pandemics or other uncertainties. This means sensible portfolio construction and risk diversification are key.
Using hedge funds in the aftermath of COVID-19 can add the most value
We believe that hedge funds can add the most value, as these funds offer active management with the ability to take advantage of unique opportunities.
Private market investments provide access to investment opportunities not generally available in the public market. Their ability to diversify away from risks playing out in traditional asset classes means that they are also more likely to mitigate losses during financial market shocks. Non-traditional exposures such as this can lower the dependence on traditional financial markets for performance, improving diversification and resulting in a lower risk for a portfolio overall.
Investor peace of mind is derived from preparation, and specifically, from the inclusion of alternative risk exposures. This helps spread risks and complement other strategies and can produce smoother return streams during periods of uncertainty.
ABOUT ALEXANDER FORBES
Alexander Forbes is a specialised financial services group headquartered in South Africa focusing on employee benefits solutions for institutional clients, and financial well-being and retail financial solutions for individual clients, in particular employees of the Group’s institutional clients. Alexander Forbes is listed on the Johannesburg Stock Exchange (“JSE”), and its primary clients span both the private and public sector market segments, including employers, retirement, health, investment and other special purpose funds on the institutional side, and individual members and beneficiaries of these funds, as well as the wider individual market, on the retail side. The main services provided by the Group include retirement funds and asset consulting, actuarial, investment and administration services, employee risk benefits and healthcare consulting, personal lines insurance, individual financial advisory and multi-manager investment solutions. Alexander Forbes’ principal geographic focus is in South Africa, where it has been operating since 1935, sub-Saharan Africa, the UK and other selected jurisdictions which have employee benefits legislative frameworks similar to South Africa.