Zenith endorses hedge fund exposure

Six out of a possible 20 hedge funds have received a recommended rating from Zenith Investment Partners, in a review it said could help dissipate common misconceptions about the alternative sector.

The investment researcher added Credit Suisse Global Diversified Strategies Fund, HFA-Diversified Investments Fund Hedged B Class, Macquarie Newton Global Futures Fund, Macquarie Newton Multi-Strategy Fund, Select Alternatives Portfolio and Select Gottex Enhanced Market Neutral Fund to its recommended list.

In Zenith’s opinion, one of the main attractions of hedge funds is the low correlation they typically have with traditional asset classes such as Australian and international equities, property and fixed interest.

Zenith senior investment analyst Glen Franklin said there was a perception in the market that because hedge funds often used leverage, they were only appropriate for higher risk profile investors.

“Zenith strongly disagrees with this perception and, due to the low correlation of hedge funds with traditional asset classes, we believe a well-managed hedge fund can be used to reduce volatility of an investor’s existing diversified portfolio,” he said.

“The typical hedge fund-of-fund will also provide a degree of downside protection during falling equity markets.”

Zenith claimed that a well-diversified 10 to 20 per cent exposure to hedge funds within an investor’s balanced portfolio was an appropriate allocation, which should not only reduce volatility and provide a buffer during downward trending equity markets, but could also enhance the long-term returns of the overall portfolio.