An Alternative Look at Hedge Funds

Murguia, Alejandro; Umemoto, Dean T.
January 2004
Journal of Financial Planning;Jan2004, Vol. 17 Issue 1, p42
Academic Journal
This article presents a critical overview of hedge funds for advisors considering them for clients' portfolios. In 2002, the number of advisors using hedge funds increased dramatically to 15.3 percent. If advisors are unaware of the operational and performance attributes of hedge funds before recommending them to clients, they may end up reading about their recommendations in the headlines of their local newspaper. Despite their popularity and phenomenal growth in assets, hedge funds have been around since the 1950s. While there is no broad consensus, the investment industry classifies hedge funds into a variety of investment strategies that are directional or nondirectional. Nondirectional strategies are structured to have low correlations with a specific market and to provide positive returns regardless of market conditions. Directional strategies attempt to benefit from broad market movements. Analyzing the accuracy of hedge fund indexes is a difficult task because a record of every single fund does not exist. A manager may have produced spectacular returns by engaging in risky trading strategies that do not require any specific manager skill. Two such strategies are short-term volatility and the Saint Petersburg concept. INSET: Executive Summary.


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