* Multi-factor approach

In contrast to long-only fund management, where investment strategies are often tethered to benchmarks and usually employ linear trading strategies, hedge funds can invest in a vast range of opportunity sets through a wide array of instruments, often employing complex non-linear or levered trading strategies, or potentially illiquid positions. Furthermore, these investment themes and niche opportunities are often turned over on a much more frequent basis, and hence the historic return profile will inevitably lag the changing dynamics of the investment basis.

Accounting for all of the above, it is evident that, relative to long-only strategies, the presence of these additional degrees of freedom in alternative strategies invariably means that traditional, return-analysis based, risk. Compounding matters, this discrepancy is widely understood to be of greatest significance in the extreme downside tail of the prevailing risk profile.

Detail: Hedge fund risk drivers from a fund of funds perspective