The Changing Benefits of Adding Hedge Funds to Traditional Asset Allocations

There are two reasons for including hedge funds in a traditional asset portfolio. First, their betas with respect to the S&P 500 are often substantially less than unity, which makes them attractive diversifiers. Second, they may provide an additional source of return and risk after adjusting for their exposure to the U.S. equity market, which has been called a structural, or allocation, alpha.

This analysis takes a look at the diversification benefit of investing in various hedge fund strategies by measuring structural alpha and downside beta. While an overall allocation to hedge funds has had a positive impact on a 60/40 portfolio, certain strategies have proved more beneficial than others. The article examines those strategies.