Hedge Funds Have A Place - Hedge Fund Investing Tips From Papamarkou Asset Management

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Hedge Fund Investing Tips From Papamarkou Asset Management

it's not by coincidence that these institutions already have large allocations to hedge funds

Sophisticated investment portfolios of qualified individual investors deserve an allocation to properly researched hedge funds, says Thorne Perkin, Vice President of Papamarkou Asset Management (http://www.papamarkou.com).

With the recent Subprime mortgage fallout, coupled with a softening housing sector and generally turbulent markets, investors have been taken for a wild ride.

Focusing on absolute return, as opposed to relative return, and generally having lower correlation to the broad indexes, hedge funds have historically out performed traditional stock and bond portfolios in these times of high volatility. "This out performance means higher cumulative returns and less portfolio volatility", says Perkin.

"Take a page from the smart money out there, the large institutional investors with billions of dollars at risk who employ teams of analytical investment talent", says Perkin, "it's not by coincidence that these institutions already have large allocations to hedge funds". In fact, many of the largest and best performing endowments, including Harvard and Yale, have been steadily increasing their exposure to the alternatives asset class including hedge funds.

Perkin explains that Papamarkou Asset Management's outlook for the hedge fund asset class looks generally positive. "As risk gets re-priced and spreads increase, hedge funds are likely to benefit from their nimble ability to capture opportunities within certain markets and sectors". Hedge funds are not tied to individual indexes like mutual funds and traditional long-only equity funds. In times of uncertainly, hedge funds can actively manage risk and restructure the portfolio to avoid suffering losses from direct market exposure. Mutual funds can not.

Perkin warns however that "hedge fund investing is not without risk". Hedge funds are complex vehicles which typically have lock ups and they are less regulated than mutual funds. In addition, the use of leverage in many hedge funds combined with investments in illiquid securities can create the potential for losses.

It is important to diversify with several managers to mitigate risk and sector/strategy overexposure. Further, says Thorne Perkin, "the hedge fund manager selection process is crucial. Extensive due diligence should be performed before investing with any manager to determine if the prospective fund has the team, skill set and discipline to execute their strategy".

For most investors this research process requires the help of experienced professionals who comprehend the investment method and risk management necessary to successfully run a hedge fund. Advisors can help their clients thoroughly understand an investment and have the ability to choose and access attractive, but often closed, opportunities. This access is important, as top performing hedge funds typically have limited availability and selectively choose their investors.

In summary, while the media lambasts hedge funds for being high risk investments, historical records demonstrate otherwise. Though past performance is no guarantee of future results and hedge funds are not for every investor, it is clear that the sophisticated portfolio aiming to achieve superior risk adjusted returns over the long term should highly consider a diversified allocation to properly researched hedge funds.

Thorne Perkin is a Vice President for Papamarkou Asset Management (http://www.papamarkou.com), an independent SEC registered investment advisor based in New York, NY. Papamarkou Asset Management, founded in 1982, advises the management of several billion dollars for its high net worth US and International client base.


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