aiCIO – \u201cDon\u2019t just do something, sit there\u201d may be precisely the advice that hedge fund investors need to hear, according to an article published by the CFA Institute.<\/p>\n
Hedge fund investors should actively rebalance their portfolio within certain bounds and avoid focusing on categories that outperform, contends the article, authored by Ted Seides, CFA. By doing so, investors can gain a leg up over their “performance-chasing” competitors. <\/p>\n
\u201cAlthough the determination of a policy portfolio for hedge funds is an imprecise art, active rebalancing is a useful science that adds value and keeps behavioral biases in check,\u201d advises Seides. \u201cIn absence of active rebalancing, allocations to hedge fund strategies inevitably drift away from espoused targets.\u201d Consequently, investors should maintain clearly demarcated policy targets and not allow their portfolio to veer outside them.<\/p>\n
Seides cautions that while anecdotal evidence supports so-called \u201cmomentum investing,\u201d a shrewd investor can outperform peers by resisting the urge to invest in last year\u2019s winners. \u201cThe odds are that one of last year\u2019s underperformers, such as long\u2013short equity, will take this year\u2019s prize,\u201d he explains. \u201cNext year, we might look back through the rearview mirror and wonder if today\u2019s case for global macro and trading strategies was little more than a behavioral bias\u2013induced rationalization for performance-chasing behavior.\u201d<\/p>\n