How hedge funds help advisers deliver smoother investment journeys

Amid uncertainty and intermittent shocks, advisors and asset managers need strategies to smooth and improve performance as investors are expressing increased concerns about the possibility of volatile returns.

Investment professionals are increasingly required to quickly make sense of events shaping investment outcomes and act promptly, and this is where hedge funds are coming into their own, Amplify Investment Partners investment specialist Chris Hall says.

Speaking at the Money Maestros Workshop, a platform for advisors which explores the intersection of technical expertise and human behaviour in investing, Hall points out that traditional performance conversations with investors focus on annualised return, benchmark outperformance, peer rankings and fees. “But what they often ignore is how volatile the path was, how much capital was lost along the way, and whether investors could realistically stay invested,” he says.

“Investors, in practice, don’t experience annualised numbers – they experience drawdowns, recovery periods, and behavioural stress,” Hall says. They seek specific outcomes tied to a time horizon (such as CPI+5% over 5 years), and some view risk as volatility and drawdowns. Market fluctuations may lead to investment behaviour that results in a “behaviour tax”.

Their investment journeys are significantly influenced by:
• Advisors, who design solutions to meet their clients’ goals, viewing risk as failing to achieve these goals and guiding clients' emotions to stay aligned with their goals, and;
• Asset managers who seek capital appreciation, mostly by taking long positions exposed to market cycles. They define risk as permanent capital loss and are exposed to market swings and rigid mandates. They have limited tools to help manage behaviour.

Hedge funds can bridge this gap, leading to better outcomes

“Portfolio construction that includes hedge funds facilitates the generation of consistent positive returns across varying market conditions and helps achieve goals more consistently,” says Hall.

“Some hedge fund managers define risk as missing an absolute return target while protecting against downside risk, and hedge strategies act as a behaviour stabiliser, leading to less client switching and improved long-term goal adherence,” he adds.

Hedge funds aim to enhance consistency due to their consistent absolute returns that are more positive than the market, irrespective of market cycles, making the client experience a smoother journey.

Amplify has nine hedge fund strategies, including equity and fixed income, with risk profiles from cautious to aggressive.

“Ignoring the client experience and fixating on returns often leads to a disconnect between asset management and financial planning. Our experience has proved that hedge funds are bridging this gap,” Hall concludes.