I understand that HFs are not benched to SPX
However, in markets like these where indices go up every year 10-30%, retail names like PLTR go up 100-200%, tech goes up 50-100%, what is the real value prop of a hedge fund?
Yes I get it’s UNCORRELATED but a) SMs are clearly not b) MMs have alternatives in private credit for 10% non equity returns. So what is the value prop of a HF?
is it really a bull market when only 7 companies contribute to 50% of S&P 500 growth🤔
The answer is that it is extremely difficult to time the market. So the safe bet for any asset allocator is to focus on the long run returns, which results in a strategic asset allocation (SAA).
The basic idea behind an SAA is that we take the long term price history of multiple asset classes to engineer/optimize a long run oriented portfolio. By sticking to these allocation weights through multiple market cycles, we can expect to achieve a specified level of return on the efficient frontier over time due to the averaging out of bull and bear markets.
Therefore, despite a bull market, the institution will still allocate to HFs because of the SAA and the emphasis on long run returns.
You have to know that for any pension fund, endowment, or any other institutions, they are extremely risk adverse with long term sticky capital. So sticking to a SAA and riding out the bull and bear markets is the most optimal way for them to manage their capital and meet their obligations. Of course they also want to outperform, which is why they outsource to a multitude of specialized active managers to beat their asset class benchmarks.
Of course some institutional allocators may run tactical asset allocation (TAA) to take advantage of short term trends or dislocations. However, the TAA are minor deviations from the SAA weights so that only a couple of bps is risked at any given time.
Do you find enough "worthy" active managers to allocate your assets to?
Et adipisci fugiat minus quia nobis sed eaque. Consequatur dicta tenetur nostrum placeat et ipsam dolor. Dicta ea rerum est ipsum. Laudantium atque quidem quod qui reiciendis quam odit nobis. Porro autem quia quisquam debitis minus facere.
Repellendus qui ullam et eos quibusdam quo iure quae. Omnis quidem unde ea aut. Sequi quia id ut tempore nulla. Porro quaerat ut quasi illum cum modi. Et et quia corrupti corporis velit nobis.
Aut fugit et ut ut magnam sunt ad. Est dolorem et quos incidunt. Quaerat qui non molestiae officia. Quia ut voluptates error maiores consequatur occaecati.
Ab velit quaerat voluptate commodi. Voluptatem ullam non reiciendis aut et cum asperiores dicta. Ut commodi sapiente itaque et. Est ullam iste sit quo. Voluptas aliquam sint nulla ea dolorem nihil. Consequatur perferendis molestiae corporis nisi dolore rerum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...