Investing in hedge funds

We offer wide-ranging expertise and support in hedge fund investments, providing a tailored solution to help investors identify and access attractive hedge fund opportunities for their portfolios. Our services cover the full investment continuum, including rigorous due diligence and manager selection, portfolio construction, risk management, access to insights, and asset manager and strategy research. 

Building robust hedge fund portfolios

Hedge funds could offer several attractive benefits for an investor’s portfolio, from attractive risk-adjusted returns to diversification benefits, access to alternative investment strategies and the potential to generate positive returns across market conditions. Hedge funds can offer investors the opportunity to access unique, unconstrained investment strategies that pursue risk and reward holistically. They typically have a broader mandate than traditional investment managers, allowing them to pursue returns in a dynamic and opportunistic way.

Hedge funds encompass a diverse range of investment strategies that offer exposure to non-traditional risks. These strategies include long/short equity, relative value, global macro, and event-driven amongst others. Each strategy has its own unique investment approach, providing investors with opportunities to access different types of risk in the market. Asset managers utilize various tactics, such as short selling, utilizing leverage, and trading derivatives, to hedge certain risks and isolate others.  Managers have different areas of focus, levels of exposure, and holding periods. 

As a highly skill- and execution-dependent asset class, manager selection is critical in hedge funds. Implemented correctly, it can offer an attractive risk-reward with meaningful downside protection. We believe an optimum alternatives allocation should include a long-term strategic allocation to unconstrained hedge funds that is matched to your organization’s needs and objectives. Mercer offers hedge funds as ‘diversifying alternatives’, a term we believe encapsulates what these kinds of funds are designed to add − an important element of diversification to your portfolio through a variety of different strategies. Essentially, hedge funds may give you a risk-controlled exposure to non-traditional sources of return. 

What are the potential benefits of hedge funds?    

Hedge funds have the potential to offer exposure to non-traditional and idiosyncratic return drivers such as M&A, long/short and arbitrage. This could give investors the ability to diversify the traditional equity, credit and interest risks that dominate a typical asset allocation.

Flexibility in hedge fund mandates allows managers to capitalize on opportunities, expertise, skill sets and a more robust risk framework, all of which can deliver asymmetric upside.

Hedge funds can offer a powerful diversifier, stretching the efficient frontier while seeking to improve risk-adjusted performance and reduce reliance on the direction of capital markets.

What are some common hedge funds trading tactics?

Shorting allows asset managers to seek profit from an asset or security falling in price by selling a stock and then later buying it back at a lower price. Asset managers may pair up securities to profit from one improving and the other declining.

Asset managers can borrow money from banks to expand the size of their portfolio and potentially enhance their returns. This approach can also magnify any losses.

Financial instruments such as equity futures or collateralized loan obligations may give asset managers access to differentiated sources of risk and return.

Asset managers often have the ability to access non-listed assets, substantially broadening their potential investment universe.

Portfolios may consist of as few as 10 to 15 investments, potentially magnifying the impact of each one on the overall strategy’s performance.

Hedge funds: The comeback kid?

Deborah Wardle, Dave McMillan and Dr. Sushil Wadhwani, (Chief Investment Officer for PGIM Wadhwani) discuss some of the key questions surrounding the hedge fund investing landscape.
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How does Mercer support clients when investing in hedge funds?

Sourcing asset managers

We run a deep and disciplined research process to source high quality established names and favorable new launches. We consider those who offer breadth and depth in insights, a disciplined research process, integrated sustainability considerations and established value-add.

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Find attractive opportunities

Leveraging our established relationships with asset managers globally, we help clients identify and access quality, capacity constrained managers that are typically unavailable to new investors.

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Negotiating underlying fees

Our global scale allows us to negotiate advantageous fee reductions and other benefits, passing all fee discounts through to investors.1

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Managing a hedge fund allocation

The key to hedge fund portfolio construction is not unlike the key to any successful portfolio comprising stocks, bonds or multi-assets − a disciplined approach and effective diversification.
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Investment solutions to suit your needs

  • Implementation and OCIO

    We can help you define, develop and implement your investment strategy by addressing areas such as governance, risk, sustainability and diversification. We flex our services to suit your needs and help you achieve your investment goals.

  • Sustainable investments 

    We help you build a sustainable investment strategy that integrates environmental, social and governance (ESG) considerations; diversity, equity and inclusion (DEI) factors and seeks an optimal mix between positive change and favorable returns.

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    Leveraging our existing relationships with hundreds of asset managers around the world, we can help you identify and source new investment strategies, opportunities, ideas and innovations across private markets and hedge funds. 

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  • Managing investment risk

    Our Mercer Sentinel team can help you conduct due diligence and mitigate operational risks across your portfolios and strategies. We assess asset managers, custodians and other service providers to help you deliver on your governance objectives.
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We are ready to help you manage, expand, enhance or fine-tune your hedge fund portfolios.

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1 Fee savings cannot be guaranteed.