Hedge funds set to blossom in 2007

Hedge funds develop deep roots Hedge funds are here to stay. Not only are larger numbers of institutional investors committing to this sector but hedge fund investment techniques are increasingly being adopted by traditional asset managers. Those who are cautious about hedge funds voice concerns about risk levels, lack of transparency, low liquidity levels and high fees, but the attractions of high returns and low correlations are highly persuasive. Therefore, it is important when selecting a manager to find one who offers education about the strategies employed and explains their investment approach clearly. For those investors who have taken the plunge, risk remains a key focus. However, rather than being a concern, they are actually employing hedge funds to mitigate the risk in their portfolio. In Mercer Consulting’s 2006 global survey on funds of hedge funds investing, investors who have made investments into hedge funds have done so to either provide: “an equal combination of portfolio risk reduction and return enhancement or primarily for risk reduction” In addition, having sampled these strategies, 53 per cent of respondents expected to increase their allocations over the next two years, with the median hedge fund allocation expected to increase from 5 per cent to 7.8 per cent over the same period. Thus what should we understand before considering an allocation?