Key to risk management is understanding
Risk mitigation and hedge funds were the central tenets of the latest Standard & Poor’s Asset Allocation report.
In analysing investment risk in the current market, the report pointed to the tendency for hedge funds to be held up as an example of the indefinable source of risk.
“On account of their mystique and, in certain cases, lack of transparency, hedge funds offer an ideal vehicle for conjecture,” it said.
But while central banks are primarily concerned with the effect that forced selling by hedge funds would have on equity, bond and currency markets, “it is not necessarily representative of the risks faced by an individual investor in hedge funds”.
According to the report, this is because hedge funds are not as leveraged to market risk as supposedly safe index funds, with derivatives used to hedge as well as leverage market risk.
Looking specifically at the performance of hedge funds, it found that given strong market returns driven by corporate deals, the most successful hedge fund strategies in October were equity long/short strategies and deal-focused event driven and distressed debt strategies.
Over the course of the month, the report indicates that Australian and international equity markets recovered from falls in September, hitting all-time highs in October.
Listed property trusts continued to be held back by concerns over further interest rate rises, but were helped by “the sector’s perceived inflation proofing and a robust yield”.
Concerns over interest rate rises had a favourable impact on local bond yields, but with better returns for overseas bonds because of cuts to interest rates in the United States.
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