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The Math That Explains How Multi-Strategy Hedge Funds Make Money
Odd Lots
Diversify Wisely: Allocate What Is Different
Most correlations in investment returns stem from common risk factors, which pension funds and endowments face when allocating their assets. Investors are compensated for taking risks, and they primarily seek to gain from investments that offer distinct risks—such as market fluctuations, interest rate changes, and various premiums. When considering investments, allocators must avoid duplicating risks they can acquire at minimal cost. For instance, if a hedge fund has a high beta, allocators may effectively be paying for exposure they could obtain cheaply elsewhere. Therefore, successful investment strategies should focus on identifying and investing in opportunities that provide unique risk exposure and enhance overall portfolio diversification.
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