in the midst of volatile stock and bond markets this year hedge funds have largely provided a buffer for investors and some private wealth managers expect these alternative investment vehicles should continue to deliver in the year ahead although aggregate returns for hedge funds fell this year through the third quarter by 93 us large cap stocks sank nearly 24 in that same period and us longterm treasuries dropped nearly 30 according to sam monfared vice president research insights at preqin a londonbased firm that provides data and analysis on alternative investments more to the point specific hedgefund strategies actually posted positive returns commodity trading advisors or cta hedge funds—which mitigate risk through the use of futures and derivatives—returned 82 through the third quarter while macro funds returned 45 and relativevalue funds returned 02 monfared says “that’s a pretty impressive overall performance” he says “the categories designed to absorb shocks in the market were able to perform as expected that’s the reason serious allocators remain interested in hedge funds” hedge funds which held about us43 trillion in assets globally as of the end of the third quarter according to preqin are one of the most mature parts of the alternatives industry monfared says they use an array of actively managed strategies across public asset classes—including foreign exchange fx and commodities in addition to stocks and bonds—and they employ techniques such as leverage or derivatives to earn higher returns they are also not for the average investor hedge funds are typically riskier than traditional investment vehicles and can’t be exited quickly also most hedgefund firms charge a management fee of 2 and a performance fee of 20 of profits and they require high minimum investments in the neighborhood of at least us1 million typically the story is different for wealthy investors in fact among hedgefund managers recently surveyed by preqin nearly 48 said they have experienced an increase in assets from private wealth management firms while nearly 45 saw no change these results “show that people keep allocating where they see value” monfared says “if you are serious about risk management you want to include hedge funds in your portfolio” at ubs global wealth management karim cherif head of alternative investments in the chief investment office says a balancedrisk portfolio should have an allocation of about 11 to hedge funds “uncorrelated” hedgefund strategies—that is those designed not to move in lockstep with markets—are among the firm’s recommended moves heading into next year penta recently spoke with cherif about why these vehicles deserve a look and the strategies to consider why invest in hedge funds now while hedge funds generally have proven to be a solid investment—returning nearly 7 over cash annually since 1990 according to ubs—they may continue to be welcome today particularly for us investors that’s because rates are continuing to rise and inflation is continuing to run at recordhigh levels a rare phenomenon that is causing both stocks and bonds to underperform by moving more or less in sync instead of diverging as usual investors have experienced “portfolio losses that we haven’t seen in quite some time” cherif says “against that backdrop investors have very few options to increase diversification in their portfolios” he says “hedge funds are one of the solutions given their ability to generate returns that are less correlated with the market movements” while rate trends and the economic environment differ countrybycountry and regionbyregion ubs expects that even globally today’s volatile trading environment isn’t likely to recede meaning it makes sense for global investors to consider hedgefund strategies to protect against downward swings cherif says hedge funds also allow investors to play offense he says while volatility is rocking every asset class from fx to credit within asset classes there are sectors that are doing well while others are not a market characteristic known as dispersion within equities for example energy and healthcare stocks have done relatively well compared with growth stocks such as technology in credit longdated bonds have done worse than shortdated or floatingrate securities cherif says “we had a long period where putting a trade on pretty much anything would most of the time end up being rewarding” he says “this is an environment where pricing risk matters more because of this you have this dispersion coming back into the market that’s what hedge funds need” specific hedgefund strategies that have performed well so far this year should continue to do well through the first quarter of next year given market dislocations and high volatility factors that benefit hedge funds according to monfared although he cautions there’s no way to know for certain how 2023 will play out one big factor is a divergence in central bank policies the bank of japan has hardly raised rates for instance while china continued to cut them and the us federal reserve raised them sharply it’s an environment that has been perfect for cta funds which monfared expects will continue cherif cautions however that the algorithms behind cta strategies tend to do best when markets are directional “if you are in a market that is trending upward then you would be long that market and if the market is trending downward you would short it” cherif says while cta strategies are doing well now they often miss the point when a market turns because the models are based on historical data he says ubs instead currently favors macro funds—which have characteristics similar to cta funds but without the algorithms—in addition to equityneutral and multistrategy funds overall the firm has recommended that investors “balance strategies and styles to diversify sources of return optimize the chances for positive performance and reduce the potential impact of any one or few drivers” macro strategies aim to capture macroeconomic shifts and imbalances in the economy drawing from a large set of asset classes typically in securities or foreign exchange that’s easily traded “historically these funds have a low correlation to broad market movements and they have been able to for example take advantage of changes in monetary policy high inflation and higher volatility” cherif says equitymarket neutral strategies use socalled longshort strategies to buy stocks they expect will outperform and short stocks they expect will underperform according to ubs’s november report on the hedgefund sector this approach enables investors to capture returns that beat the market and can do well when there is high dispersion within stocks as is the case today ubs also likes multistrategy funds that can take advantage of the best opportunities across every hedgefund strategy “it’s a solution where you can put capital where the most attractive riskreward is and also adjust as the economic environment changes” cherif says