There has been a great deal of press in recent years given to portfolio diversification, in particular to the use of hedge funds as a means of alternative investment strategy. Many times these funds are referred to as vehicles to use for diversification, because they are not linked to traditional investments, such as stocks and bonds. However, on a closer inspection, it becomes evident hedge funds, while using sophisticated tools such as derivatives, controlling purchases in companies, merger arbitrage and venture capital, are still very much connected to traditional investments, and also remain illiquid, expensive and prone to risk.
Are these investments suitable for your portfolio? The answer depends on your appetite for risk, tolerance for illiquidity and overall investment goals. In the past, these funds were marketed to very high net worth individuals, but recently, this unregulated asset class has been marketed to a larger group of investors, in order to increase market performance during times of low returns. Some fee-based Financial Advisors have been recommending them, to increase returns in portfolios, where the advisory fee is deducted from quarterly returns,...
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