There is “no direct relationship” between hedge fund leverage and the volatility and downside risk of performance, a study claims.
Adding leverage to an alternative investment fund does not necessarily increase the risk, say two bodies from the alternatives industry.
The Alternative Investment Management Association (Aima), a trade group, and the CAIA Association, an educational group focused on alternative investments, say relative value and arbitrage strategies have lower volatility on average despite typically having the highest leverage ratios of all hedge funds.
These two strategies have also seen smaller losses during crises and other periods of market stress over the last 20 years.
Equally, funds that typically employ lower leverage, such as long/short equity funds, have experienced marginally higher volatility and drawdowns since 1996.
An Aima/CAIA report – ‘Made to Measure: Understanding the use of leverage in alternative investment funds’ – says this suggested that a fund’s risk profile is influenced more by the underlying investments than the use of leverage alone.
The report says the three forms of leverage – financial leverage, derivatives leverage and portfolio leverage – in many cases can minimise or control portfolio risk.
Jack Inglis, Aima chief executive, said: “Leverage and risk are not the same thing. Most hedge funds use a modest amount of leverage – but as our study shows, even those with higher leverage levels are not inherently more risky than, say, investing directly in equities, commodities or other traditional asset classes.”
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