An overview of hedge funds

December 2022

Hedge funds attract a great deal of attention and assets from investors. As of June 2022, hedge funds were estimated to be a $4 trillion industry (Source: Reuters) that includes a broad variety of strategies. While many institutional investors use hedge funds, their popularity has declined in recent years. This is most likely due to the disconnect between the performance of hedge funds and the (unrealistic) hype that surrounded them when they were initially adopted by many institutions.

The way the industry views hedge funds has evolved substantially over the past two decades. Though they were once considered the province of mystics and savants, most institutions now take a more skeptical and scientific look at hedge funds. This is likely due to a greater understanding of the strategies employed, the high costs of those strategies, and the returns experienced.

Despite their disappointing performance, we believe hedge funds can play a role in investors’ portfolios. This paper seeks to clarify what a hedge fund is, describe the tools they may use, and provide an overview of the different hedge fund strategies. It then explores what role hedge funds typically play in an investor’s portfolio, as well as considerations for implementing a hedge fund allocation.