Hedge Funds

5-Year Performance of Our Hedge Funds
Characteristics of Hedge Funds
Understanding Hedge Funds
Quarterly Update: Strategy Exposure and Global Diversification

Much has been written about hedge funds regarding their degree of riskiness relative to more traditional investing, leading many investors to view such investment vehicles with some concern. For this reason, we would like to share some of the reasons why we feel that these investments are generally beneficial to the YMCA Retirement Fund.

It is helpful to start any discussion of hedge funds with a few comments to better understand what they are. The term "hedge fund" is actually a very generic term, much like the term "mutual fund," in that it does not describe a particular investment strategy. In fact, hedge funds pursue a wide range of investment strategies in different capital markets around the world.

Currently, 6% of the Fund’s assets are invested in three different hedge fund-of-funds, and they are representative of some of the largest and most successful hedge fund-of-funds managers in the business. The combination of these funds represents approximately 340 different hedge fund managers with exposure to as many as twelve different investment strategies, including fixed income-like strategies.

5-Year Performance of Our Hedge Funds
Hedge Funds were placed in our portfolio with the expectation that they could achieve "equity like" returns with about 50% of the risk of stocks. For the most recent five year period, our hedge fund managers recorded an annualized return of +4.03% versus domestic stocks (Russell 3000), which had a return of 1.56%, and the risk (volatility) was in fact less than half of that of stocks.

Characteristics of Hedge Funds
While the strategies that hedge funds pursue can be varied, they do have some common characteristics. One important characteristic is that hedge funds typically have what is referred to as an "absolute return" orientation. This means that these funds measure their success based on the absolute level of profitability and not relative to some market benchmark, such as the S&P 500. One of the most important characteristics of hedge funds that help them accomplish this absolute return objective is their ability to invest both long and short. By having the flexibility to invest both long and short, many hedge funds are equipped to be able to find profits in both rising and falling markets. Of course, having the ability to invest this way does not mean that all hedge funds will be successful at it, which is why manager selection is so important.

In a market environment of muted investment expectations, hedge funds tend to be particularly favored for their low volatility (risk) and low correlations to more traditional asset classes (the degree to which hedge returns move independently of stock and bond returns). The combination of positive returns, low volatility and low correlations actually reduces overall risk for the Fund and contributes greatly to maintaining stable and positive returns.

Understanding Hedge Funds
When investing in hedge funds, the preferred investment of choice for many pension funds is hedge fund-of-funds – a vehicle used exclusively by your Management. A hedge fund-of-funds is a vehicle not unlike a mutual fund in that it invests in numerous individual hedge funds. A fund-of-funds can control risk by achieving manager diversity and the strategies those managers employ. To the investor, this allows them to participate in a unique asset allocation mechanism while hopefully limiting downside risk.

Hedge fund-of-funds:

Are an ideal way to gain access to a wide variety of hedge fund strategies, managed by many of the world’s premier investment professionals.
Deliver more stable returns under most market conditions due to the fund-of-fund manager’s ability and understanding of the various hedge strategies.
Significantly reduce individual fund and manager risk.
Allow for easier administration of widely diversified investments across a large variety of hedge funds.
Allow access to a broader spectrum of leading hedge funds that may otherwise be unavailable.

Below are illustrations of both our strategies as well as our geographic diversification.

Management has a goal of experiencing only half of the equity market’s volatility while attaining 75% of equity market returns. Unlike some hedge fund strategies, these investments are meant to dampen risk, not reach for extra return. This provides an investment portfolio with lower levels of risk and can deliver returns that have low correlations to the stock market.

This is why these investments are generally beneficial to the YMCA Retirement Fund.