Hedge Funds from an Asset Management Perspective

The emergence of hedge funds as alternative investments raises important issues from the perspective of investors as hedge funds offer a distinct combination of risk and return. In particular, hedge funds are absolute return investment products that are subject to almost very few investment restrictions. This may attract the most talented investment managers due to their compensation arrangements. Therefore, hedge funds can pursue a wide range of proprietary trading strategies in nearly all financial markets. As a result, hedge funds outperformed most other asset classes and generally exhibit low volatilities. In addition, it is often argued that hedge funds exhibit low correlations with other asset classes and therefore provide their investors with additional diversification opportunities. This suggests that hedge funds offer investors access to a combination of alpha, i.e. positive abnormal returns, and exposures to alternative risk factors that compensate for taking on liquidity and other risks.