Investors Rethink How to Use Hedge Funds

Today’s multi-asset class investors are taking a fresh approach to hedge funds in order to achieve their portfolio goals. Prime Services’ David Shalom explores allocators’ top three areas of focus when rethinking how to use hedge funds.

At BNY Mellon’s Pershing, our capital introductions group works with institutions and private wealth investors to understand which hedge fund strategies they’re looking for and their thought process behind manager selection. As a result, we’re able to share the latest trends on changing investor demand and the factors driving those changes with our hedge fund clients via our periodic newsletter called “What’s Trending With Allocators.”

Currently, a trending topic of discussion is how hedge funds are used. Historically, multi-asset class investors have used standalone hedge fund allocations, also referred to as “trading alpha strategies,” as diversifiers against their equity and credit beta exposures. However, the returns generated from a standalone basket of hedge funds have caused investors to think about how hedge funds can be more effectively used in their portfolios.

In rethinking how to use hedge funds, there are three areas of focus for allocators:

Strategy fit: The strategy’s objective may be to beat beta or to be a diversifier against beta. Depending on the objective, investors may categorize beta plus strategies as long only strategies instead of diversifier strategies.
Independent returns: Investors are looking for hedge funds that produce alternative return streams or returns that are truly independent from long only equity and credit markets – not just less correlated returns.
Role in the market: Investors are looking for hedge funds that can receive the greatest premium from their role in the market, including managers that serve as liquidity providers and managers trading around inefficiencies created from market structure issues.

Other trending investor preferences include managers with specialized skill sets that are not broadly available, managers with superior trade execution abilities over their peers, and managers who offer “new normal” fee structures.

Our Prime Services team at Pershing provides hedge funds with a solution set that includes capital introductions, securities lending, and financing. By offering leverage, our clients can take advantage of market conditions, expand their portfolio beyond direct capital, and become more efficient with their own capital.

If you’re interested in receiving our “What’s Trending With Allocators” newsletter and learning more about our prime services offering, please reach out to the Prime Services team at Pershing.

ABOUT WHAT’S TRENDING

Our What’s Trending newsletters and videos share allocator views on investment strategies and considerations when selecting fund products.

ABOUT BNY MELLON’S PERSHING

BNY Mellon’s Pershing and its affiliates provide a comprehensive network of global financial business solutions to advisors, broker-dealers, family offices, hedge fund and ’40 Act fund managers, registered investment advisor firms and wealth managers. Many of the world’s most sophisticated and successful financial services firms rely on Pershing for clearing and custody; investment, wealth and retirement solutions; technology and enterprise data management; trading services; prime brokerage and business consulting. Pershing helps clients improve profitability and drive growth, create capacity and efficiency, attract and retain talent, and manage risk and regulation. With a network of offices worldwide, Pershing provides business-to-business solutions to clients representing approximately 7 million investor accounts globally. Pershing LLC (member FINRA, NYSE, SIPC) is a BNY Mellon company. Additional information is available on pershing.com, or follow us on Twitter @Pershing.

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