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Equity and credit markets continue to fall.
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Investors have shifted their allocation into cash and government bonds.
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Correlations between assets is not 1. In fact, correlations between hedge funds and other asset classes such as equity have fallen from 95% in 2006 / mid 2008 to 70% currently.
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Moving allocations into a risk free asset does not monotonically reduce portfolio risk. There comes a point at which adding to the risk free asset increases portfolio risk.
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Moving capital en masse into any asset, even a risk free one, eventually increases the risk in the asset, and consequently in the portfolio.
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If you do trust volatility as a risk measure, hedge funds have better Sharpe ratios which recommend overweighting them.
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If you don’t trust volatility as a risk measure, the absolute loss incurred by hedge funds has been less than for long only passive strategies.