Characteristics of Hedge Funds
While the strategies that hedge funds pursue can be varied, they do have some common
characteristics. One important characteristic is that hedge funds typically have what is
referred to as an “absolute return” orientation. This means that these funds measure
their success based on the absolute level of profitability and not relative to some
market benchmark, such as the S&P 500. One of the most important characteristics
of hedge funds, which helps them accomplish this absolute return objective, is their
ability to invest both long and short. By having the flexibility to do so, many hedge funds
are equipped to be able to find profits in both rising and falling markets. Of course, having
the ability to invest this way does not mean that all hedge funds will be successful at it,
which is why manager selection is so important.
In a market environment of muted investment expectations, hedge funds tend to be
particularly favored for their low volatility (risk) and low correlations to more traditional
asset classes (the degree to which hedge returns move independently of stock and
bond returns). The combination of positive returns, low volatility and low correlations
actually reduces overall risk for the Fund and contributes greatly to maintaining
stable and positive returns.
