In this sixth edition of SkyBridgeViews, read our recently published white paper (link here).
Hedge fund investors grasp that their capital will be subject to loss (or gain) from market and other investment-related risk. However, they must also appreciate that their capital will be susceptible to loss – but never gain – from a number of non-investment related risks. Business and operational risks can materially impact a hedge fund investment. Therefore, investors should be aware of the potential effect these risks can have on their portfolios.
A Guide to Hedge Fund Business & Operational Due Diligence, a new white paper issued by SkyBridge Capital, strives to inform investors of these business and operational risks and emphasize the importance of a thorough due diligence program.
Alternative investments are investment strategies that utilize trading techniques historically unavailable through public markets. These strategies include hedge, private equity, real estate, managed futures, and other funds typically offered only to sophisticated institutional and private investors.
Alternative investments have the potential to enhance the risk and/or return characteristics of an investment portfolio. Given their low correlation to traditional investments, they can potentially enhance diversification and reduce risk; with their ability to be more flexible and invest in a wider opportunity set, they can potentially enhance returns; and they can be used to hedge certain portfolio exposures, thereby reducing concentration risk. However, alternative investments involve a high degree of risk and there can be no guarantee of performance.
A hedge fund is an investment fund that can generally carry out a wider range of investment and trading activities than other types of funds (such as mutual funds). Hedge funds invest in a diverse range of assets and employ a wide variety of investment strategies. SkyBridge classifies hedge funds into four major strategies including directional equity, directional macro, event driven and relative value.
Most hedge funds seek to achieve absolute returns with less volatility or risk than equity markets. Investment returns, risks, and manager competency may vary significantly among different hedge funds and should be considered prior to investing.
It requires significant skill, time, resources, and capital commitment to appropriately invest in hedge funds. Many investors find it attractive to have a professional investment manager allocate on their behalf through a fund of hedge funds structure.
Fund of Hedge Funds
A fund of hedge funds invests in a portfolio of hedge funds to provide broad exposure to the hedge fund industry and to seek to diversify the risks associated with a single investment fund. Fund of hedge funds select hedge fund managers and construct portfolios based upon those selections. Investing in a fund of funds may achieve greater diversification while reducing volatility (compared to equity markets), however there can be no guarantees of performance and there is a risk of loss of principal.
SkyBridge is an alternative asset manager that specializes in fund of hedge funds, custom portfolio and hedge fund advisory services.