By: Jeff Gabrione
Chicago, United States
Tel: +1 (312) 902-7500

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The idea of making a hedge fund allocation is no longer as exotic as it once was. As with international investing, what was once new and different has slowly gained acceptance with fund sponsors as a means of furthering portfolio diversification and enhancing fund performance.

Continued growth in the number of hedge fund managers as well as institutional assets under management points to this on-going trend.

In response to investor demand new hedge fund strategies and fund structures are being created, making investment choices more complex than ever.

Look before you leap

While the hedge fund allocation decision is a key component to the investment process, the actual implementation of that decision involves analyzing various fund structures and implementation choices, each with its own advantages and disadvantages.

The best approach depends on the asset size of the fund, the risk tolerance of the committee, cost and available resources. The nature of hedge fund strategies, vastly different in scope coupled with a high reliance on manager skill to produce alpha, presents a challenge. Dispersion of manager performance is quite high relative to traditional asset classes, and selecting the right manager and properly diversifying the portfolio are critical.

Sponsors should first examine the ideal characteristics most relevant to their organization, and then turn to the advantages and disadvantages of the various fund structures and implementation choices.

While there is no one right answer, proper due diligence is necessary in meeting fiduciary responsibilities and critical to achieving the sponsor’s ultimate objectives.

A guide for navigation

This article provides a framework for navigating through implementing a hedge fund choice in an institutional portfolio. It discusses the different fund structures and implementation choices available and provides a set of questions to help focus the decision making process.

Copyright Fund China 2009.

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