Hedge Funds Aren’t Just For Diversification: Lyxor Asset Management

Hedge funds typically advertise themselves as a good way to get absolute returns that are uncorrelated to stocks and bonds, but long/short strategies mopped up last year on the back of the stock market rally and were awarded with strong net inflows.

Instead of arguing about whether this is the rise of smart beta, or if some hedge funds have shirked their mandate to find returns that an index can’t provide, Lyxor Asset Management quants Zelia Cazalet and Ban Zheng have simply reclassified hedge funds into three distinct categories as a new starting point for portfolio management: equity substitute, bond substitutes, and diversifiers.

“Hedge funds are attractive investment tools. Nonetheless, they are more sophisticated than traditional assets, hence requiring greater...