Asset-based hedge fund styles and portfolio diversification

Fung, W and Hsieh, D (2001) Asset-based hedge fund styles and portfolio diversification. Working Paper. London Business School Centre for Hedge Fund Research and Education Working Paper.

Abstract

It is a welldocumented stylized fact that hedge fund returns differ from the returns of traditional asset classes. Investors looking for alternative return characteristics in hedge funds are clearly concerned about the question of consistency. To go beyond relying on historical hedge fund performance repeating itself, one needs to answer the key question on hedge fund performance: "What is the wind behind this sail?" After all, hedge fund managers typically transact in similar asset markets to traditional managers. How then do they deliver different return characteristics to the very asset classes they trade? We believe the answer to these questions lies in understanding the value of hedgefund strategies and how they can be directly related to traditional asset classes.