Editing Hedge fund (section)

===Value in a mean/variance efficient portfolio===
According to [[modern portfolio theory]], rational investors will seek to hold portfolios that are mean/variance efficient (that is, portfolios that offer the highest level of return per unit of risk). One of the attractive features of hedge funds (in particular [[market neutral]] and similar funds) is that they sometimes have a modest correlation with traditional assets such as equities. This means that hedge funds have a potentially quite valuable role in investment portfolios as diversifiers, reducing overall portfolio risk.<ref name="Roadmap"/>

However, there are at least three reasons why one might not wish to allocate a high proportion of assets into hedge funds. These reasons are:
* Hedge funds are highly individual, making it hard to estimate the likely returns or risks.
* Hedge funds' correlation with other assets tends to rise during stressful market events, making them much less useful for diversification in bad times than they may appear in good times.
* Hedge fund returns are reduced considerably by the high fees that are typically charged.

Several studies have suggested that hedge funds are sufficiently diversifying to merit inclusion in investor portfolios, but this is disputed for example by Mark Kritzman who performed a mean-variance optimization calculation on an opportunity set that consisted of a stock index fund, a bond index fund, and ten hypothetical hedge funds.<ref>''Portfolio Efficiency with Performance Fees'', Economics and Political Strategy (newsletter), February 2007, Peter L. Bernstein Inc.</ref><ref>{{cite news |last=Hulbert |first=Mark |url=https://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |title=Hulbert, Mark ''2 + 20, and Other Hedge Fund Math'', ''New York Times'', 4 March 2007 |newspaper=[[The New York Times]] |date=4 March 2007 |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20111209204544/http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |archive-date=9 December 2011 |url-status=live |df=dmy-all }}</ref> The optimizer found that a mean-variance efficient portfolio did not contain any allocation to hedge funds, largely because of the impact of performance fees. To demonstrate this, Kritzman repeated the optimization using an assumption that the hedge funds took no performance fees. The result from this second optimization was an allocation of 74% to hedge funds.

Hedge funds tend to perform poorly during equity [[bear market]]s, just when an investor needs part of their portfolio to add value.<ref name="Roadmap"/> For example, in January–September 2008, the Credit Suisse/Tremont Hedge Fund Index returned -9.87%.<ref>{{cite web |url=http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD |title=Credit Suisse/Tremont Hedge Index web page |website=HedgeIndex.com |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100819170411/http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD |archive-date=19 August 2010 |url-status=live |df=dmy-all }}</ref> According to the same index series, even "dedicated short bias" funds returned −6.08% in September 2008, when [[Lehman Brothers]] collapsed.