The research paper analyzes the risks involved in hedge funds and private equity, and describes the best practices and due diligence steps that investors need to pursue to manage those risks. The paper also explores the complexity of volatility, leverage, and liquidity and how these factors together can compound risk.
“Complexity and volatility are the norm for investors, as today we seem to have a 100-year financial storm about every three years or so. As a result, returns for the decades ahead are almost assuredly going to look much different,” said Steve McMenamin, executive director of The Greenwich Roundtable. “Those investors who can manage volatility and understand the complexity embedded in their portfolios will continue to be the long-term winners.”
Key insights described in the white paper include:
- The cost of alternatives strategies is the complexity they add. The benefit is the ability to source returns from a broader spectrum of opportunities.
- Correlations matter, and they vary through time. Investors must try to understand the changing nature of relationships across their portfolios.
- Investors need to understand how each manager approaches leverage and evaluate the appropriateness of the amount and duration of that leverage.
- Liquidity is dynamic. It changes as markets change. This calls for ongoing due diligence and manager monitoring, including stress tests and projections with ample wiggle room.
“Each investor must decide whether it is adequately prepared to invest competently in alternative investments,” said Rusty Olson, former director of pension investments for Eastman Kodak Company and editor of the paper.
The Greenwich Roundtable is a not-for-profit research organization comprised of institutional investors overseeing collectively $2.2 trillion in assets.This is the sixth in a series of white papers on Best Practices in Alternative Investments published by The Greenwich Roundtable. Information about obtaining a copy is available atwww.greenwichroundtable.org.