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Approach to Risk

Creating predictable results

A hedge fund should produce a higher, more predictable return for a lower level of risk than other investments.

Internationally the hedge fund industry is growing in excess of some 25% per annum and there is large movement from the more conservative asset managers to invest in hedge funds. According to an ongoing survey by Goldman Sachs and the Frank Russell Company, U.S. pension funds, endowments, and foundations have more than quadrupled their investments in hedge funds in the past decade. Increasingly, individual and institutional investors alike are using hedge funds to boost portfolio returns while managing risk.

The performance of many hedge funds is not dependent on the direction of the bond or equity markets - unlike conventional mutual funds, which are generally fully exposed to market risk. Hedge fund returns, over a sustained period of time, have outperformed equity and bond indices with less volatility and less risk of loss than equities. Investing in hedge funds tends to be favored by the more sophisticated investors who have lived through and understand the consequences of sharp stock market corrections.

Approach to Risk

  • Market Neutral. Managers of market-neutral long/short equity hedge funds invest in securities they believe are sufficiently balanced to keep the portfolio buffered from a severe market swing. Typically, they make sure the baskets of long and short investments are beta neutral. Beta is the measurement of a stock’s volatility relative to the market. A stock with a beta of 1 moves historically in sync with the market, while a stock with a higher beta tends to be more volatile than the market and a stock with a lower beta can be expected to rise and fall more slowly than the market.

  • Specific and Objective Trade Plan. Investment approach is diversified by employing various, clearly defined strategies simultaneously to realize short- and long-term gains. This style of investing allows the manager to overweight or underweight different strategies to best capitalize on current investment opportunities while removing emotion from the equation.

  • Back-tested Results. Fund Managers that trade based on technical analysis have the benefit of utilizing computer-assisted back-testing models that produce profitability ratios. These ratios mathematically measure the risk and return of various strategies under different market conditions.


  About Hedge Funds
 Approach to Risk
 Comparison to Mutual Funds