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The fund industry has been enjoying a period of strength, after several challenging years. (ddp)

Alternative Hedge fund upswing looks set to continue

24 August 2021, 10:01 am CEST, written by UBS Editorial Team

The hedge fund industry has produced good returns so far this year and attracted renewed inflow from . We believe the outlook going forward remains positive, with hedge funds offering an appealing combination of attractive returns, downside mitigation, and diversification.

The hedge fund industry has been enjoying a period of strength, after several challenging years. Year-to-date the average hedge fund is up between 5% and 10%, according to HFR indexes. This solid result follows an 11.8% return last year, one of the best outcomes since 2009. Meanwhile, after suffering withdrawals of more than USD 170bn over the past five years, hedge funds gained a net USD 18.4bn in the first half of 2021.

Hedge funds look set to continue to provide an appealing combination of attractive returns, downside mitigation, and diversification.

1. Technical market factors remain conducive of hedge fund returns. The transition to a reflationary environment is likely to continue, benefiting certain sectors and classes while hindering others. This dispersion typically increases opportunities for fund managers. Meanwhile, structural shifts (including sustainability, digitalization, and deglobalization), corporate deal activity, and flows are all creating opportunities hedge funds can take advantage of. Overall, the current backdrop is supportive of hedge fund returns.

2. As an alternative to holding outright, hedge funds can be a defensive way to build market exposure. Hedge funds typically exhibit a lower to global markets and include a focus on management and downside mitigation. Hedge funds could be a potential for investors looking to lock in some market gains while maintaining some exposure, or for those looking to cautiously build fresh positions.

3. Hedge funds are an important source of diversification. The /equity correlation has been positive recently as markets have focused on the outlook for inflation and monetary policy. As a result, bonds and equities may no longer For UBS marketing purposes

diversify one another as well as in the past, making hedge funds more important as an alternative diversifier in a context.

So, we believe that the recent positive trends for the hedge fund sector look set to continue, and we advise investors to maintain adequate exposure. For more on downside protection strategies, click here.

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