Research by Edhec shows that investing hedge funds can reduce the risk of extreme loss in a portfolio by as much as half.
The report, The Benefits of Hedge Funds in Asset Liability Management, states that hedge funds should be seen as a complementary management style to asset classes rather than as an entirely separate asset class.
The report states that hedge funds trading on stocks and financial market trends started 2006 with returns of almost four per cent, higher than recent global stock market gains, while managed futures funds (commodity trading advisors) returned 3.88 per cent last month and equity market neutral strategies returned 2.25 per cent.
The weakest performing hedge funds were event driven strategies, which returned 2.21 per cent and hedge funds which trade on the various components of convertible bonds (1.7 per cent).
Marketing manager at the Edhec Risk and Asset Management Research Centre, Peter O'Kelly, told IPE International: "In the past, hedge funds have been considered to give alpha benefits for asset managers. But their main benefit is to reduce risk by diversification, particularly since they are not correlated with other asset classes.
"So rather than look for absolute returns from hedge funds, managers should be thinking in terms of using them to diversify the portfolio and reduce volatility."