Hedge funds are proving to be very popular with investors in New Zealand and around the world at the moment.
Two of the key questions advisers and investors should be asking are: Are hedge funds a separate asset class and how should they be included in a well-diversified portfolio?
Frank Russell's Tacoma-based manager of investment policy and research Andy Turner is quite clear that hedge funds are not a separate asset class.
To determine whether an investment type, or group, can be called an asset class it needs to be compared against six key criteria.
On Turner's count hedge funds only pass one of these six tests, so they can't be considered a separate asset class.
"They don't stack up very favourably." Turner says.
How then, should an investor include hedge funds in a diversified portfolio?
Turner's view is that because hedge funds aren't an asset class they shouldn't be used in a strategic asset allocation.
"We think (hedge funds) are out in terms of your strategic asset allocation," he told delegates at Frank Russell's Australasian conference last week.
Although Turner raises some concerns about hedge funds from an asset allocation point of view, he is not saying don't use them.
"For some people we think these are a good idea."
Those investors maybe ones who have larger percentage of their money in equities.
For people who don't have a lot of shares, they there are better, more risk controlled options for ramping up returns.
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