How Do Hedge Funds Work?

Abstract

In the worst 10 quarters for global equity markets since 1990, hedge funds (as measured by the HFRI Fund of Funds Composite Index) outperformed a long-only investment in the MSCI World Index in all cases. This illustrates two of the primary reasons why sophisticated investors choose to allocate a portion of their well-diversified portfolio to hedge funds: the ability to preserve value in down markets, and low correlation to traditional stocks and bonds.