Hedge funds no common or garden instrument

Hedge funds have become increasingly common in investors' portfolios over the past couple of years, largely due to the belief they deliver even in bear market conditions. But when investors seek information on hedge fund performance they're confronted by about 12 different strategies.

Caution should be exercised when looking at performance data, according to AMP Capital Investors, as track records may be limited and sometimes unavailable over a range of market cycles. Hedge funds also lack transparency as hedge fund managers are unwilling to say how they achieve their returns.

AMP Capital Investors says that while hedge funds may do better in a bear market, they may not do so well when mainstream sharemarkets are performing strongly. Russell Investment Group advises investors take a “buyer beware” attitude when selecting hedge fund mangers because the success of a fund depends largely on its manager's skills.

Most analysts agree that the best way to enter the hedge fund market is through a diversified fund of hedge funds so that management styles and risks are spread.

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