A wide variety of investors choose to invest in hedge funds with pension funds being the largest category. They are drawn to hedge funds thanks to the low correlation with their other assets and ability to generate alpha, or excess returns. These returns are generated with the use of leverage or borrowing which allows hedge funds to take risks in excess of regular funds. Although hedge funds have underperformed the S&P over the last 25 years, they have been less volatile and provide a better investment on a risk adjusted basis.
Key learning objectives:
Who invests in hedge funds?
How do hedge funds use leverage to generate returns?
How have hedge funds performed?