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Taking a long-term perspective is crucially important for success with hedge funds.

Market conditions ebb-and-flow over time, and various hedge fund strategies perform differently during changing market conditions. In the same manner that value and growth stocks or domestic and international equities move in and out of favor over time, hedge fund strategies show similar tendencies, with each responding differently to economic and market conditions.
Some hedge fund strategies are meant to provide capital appreciation, while others are designed to preserve wealth and diversify portfolios. Capital appreciation strategies include event-driven and hedged equity, while the objective of relative value, macro and multi-strategy hedge funds is preservation of capital and low correlation to the broader markets.

Varying benefits of hedge fund strategies


For illustrative purposes only.

Strategies designed to outperform in specific market environments.

Event driven strategies, for example, may provide higher returns during periods when companies seek out specific ways to increase shareholder capital, as opposed to simply benefitting from the “rising tide” of equity markets drifting higher over time. Relative value may provide higher returns when market correlations are low, and when increased volatility causes the relationship between different assets to expand and contract over time.

Neither strategy outperforms when global assets rise in a highly correlated manner with little differentiation in value – as had been the case for most of the 2011 through 2015 period, for example – and when there is little need for companies to engage in transformative events if their stock price drifts higher every day.

Targeting downside protection and reduced volatility

Looking back over the past 20-years (2000 – 2020), global equities experienced a monthly decline 97 times, or roughly five months per year. Equity hedge, the strategy most highly correlated to long-only equities, fell in 82 of those 97 months, while event-driven declined 68 times. Other strategies, including relative value, macro, and multi-strategy, each fell between 49 and 59 times, meaning that they were able to generate positive performance nearly half the time that equities declined on a per-month basis. 1

  • Shifting our attention to the magnitude of loss, we see that the average monthly decline for global equities was -3.79% over those 97 months. Looking at the more highly correlated strategies, the average loss for equity hedge and event driven was -1.79% and -1.01%, respectively, meaning that each has historically captured less than one-half and less than one-third of the downside risk, respectively, over the past 20 years, as compared with global equities. 2

The wealth preservation and portfolio diversification strategies, not surprisingly, experienced even less downside volatility with relative value, macro and multi-strategy funds declining by less than 40 basis points on average, which represents approximately one-tenth of the downside sensitivity to equity markets. These strategies enable advisors to hedge their client portfolios and protect their wealth through exposure to sources of returns away from volatile, long-only equity markets.

Understanding how certain hedge fund strategies have added long-term value provides advisors with the context and confidence to allocate capital in ways that can lead to higher performance, and with less risk, over time.

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(1) Source: FactSet and Hedge Fund Research, Inc. and iCapital calculations.
(2) Source: FactSet and Hedge Fund Research, Inc. and iCapital calculations.


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Joseph Burns

Joseph Burns

Joseph is a Managing Director, Co-Head of Research and Head of Hedge Fund Solutions at iCapital. Before joining iCapital, Joseph was Chief Operating Officer at TCS Capital Management, a global equity hedge fund where he focused on global business development and portfolio risk management. Joseph holds a BA in Political Science from Manhattanville College and an MBA from Fordham University. See Full Bio.