London – 25 October 2016: Adding leverage to an alternative investment fund does not necessarily increase the risk, according to a new study by the Alternative Investment Management Association (AIMA), the global representative for alternative asset managers, and the CAIA Association, the global leader in alternative investment education.
The AIMA/CAIA study suggests that there is no direct relationship between hedge fund leverage and the volatility and downside risk of fund performance. For example, funds that typically have the highest leverage ratios of all hedge funds – those using relative value or arbitrage strategies – have lower volatility on average and have suffered smaller losses during crises and other periods of market stress over the last 20 years. Equally, funds that typically employ lower leverage, such as long/short equity funds, have experienced marginally higher volatility and drawdowns since 1996. The authors said this suggested that a fund’s risk profile is influenced more by the nature of the underlying investments than the use of leverage alone.
The report, entitled “Made to Measure: Understanding the use of leverage in alternative investment funds”, also highlighted the different impacts of the three forms of leverage - financial leverage, derivatives leverage and portfolio leverage. In many cases, adding particular types of leverage minimises or controls portfolio risk, the study found. The title of the report refers to the fact that fund managers are increasingly tailoring the use of the different forms of leverage to meet individual investors’ risk and return objectives.
AIMA CEO Jack Inglis said: “Understanding the impact that leverage can have on a portfolio is essential for pension funds and other investors. Leverage and risk are not the same thing. Most hedge funds use a modest amount of leverage – but as our study shows, even those with higher leverage levels are not inherently more risky than, say, investing directly in equities, commodities or other traditional asset classes.”
“It is important for investors to understand the wide variety of strategies, risks, and returns of various hedge fund strategies,” said Keith Black, Managing Director of Curriculum and Exams at the CAIA Association. “One of the keys to this understanding is a knowledge of the forms that leverage can take, which can range from borrowing-based leverage used to increase risks to short selling and derivatives-based leverage that can be used to reduce risks.”
“Made to Measure” is the third in a series of educational papers about hedge funds for pension fund trustees and other fiduciaries by AIMA and the CAIA Association. The previous studies focused on allocator issues (“The Way Ahead”) and hedge fund strategies (“Portfolio Transformers”). The next paper, due to be published in 2017, will focus on liquidity.
ENDS
Notes to editors –
Click here for the report.
For further information, contact -
Dominic Tonner
AIMA
+44 20 7822 8380
Deborah McLean
CAIA Association
+1 413 253 7373
Chris Sullivan
MacMillan Communications (for CAIA Association)
+ 1 212 473-4442
About AIMA
AIMA, the Alternative Investment Management Association, is the global representative of the alternative investment industry, with more than 1,700 corporate members in over 50 countries. AIMA works closely with its members to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes, and sound practice guides. AIMA's core objective is to provide leadership to the alternative investment industry, and to be its pre-eminent voice globally. AIMA's team engages proactively and constructively in shaping the financial markets reform debate, drawing upon the expertise and diversity of its membership. AIMA is closely aligned with and promotes the best interests of the alternative investment industry in order to enhance the wider understanding of its function. AIMA has cultivated positive and lasting relationships with regulatory, fiscal and governmental authorities around the world, whilst upholding engagement with the media in order to achieve a more accurate and informed tone of news. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). For further information, please visit AIMA’s website, www.aima.org.
About the CAIA Association
The CAIA Association is the world leader in alternative investment education, offering the only education program uniquely designed for individuals specializing in institutional-quality alternative investments. The Association is best known for the CAIA Charter, an internationally-recognized credential granted upon successful completion of a rigorous two-level exam series, combined with relevant work experience. Earning the CAIA Charter is the gateway to becoming a Member of the CAIA Association, a global network of more than 8,400 alternative investment professionals located in more than 90 countries. CAIA also offers the Fundamentals of Alternative Investments Certificate Program (”Fundamentals”), an introductory-level online course, designed to provide a foundation in the core concepts in alternative investing. This program represents a natural extension of CAIA’s mission to provide solutions to specific market needs for alternative investment education. The CAIA Foundation partners with leading industry organizations to increase knowledge and talent in the field of alternative investing. Please visit http://foundation.caia.org for more information.
