In 2002 we became interested in hedge funds and took an in-depth look at them. Our conclusions were:
Generally, hedge funds do not fit the majority of our clients.
However
There is one hedge fund concept that is of great interest. That is something called an
Absolute Return.
In hedge fund parlance, Absolute Return means:
A positive return every year that is two to three times the risk-free rate of return.
We set out to determine if such a portfolio could be constructed with stocks and bonds rather than typical hedge fund complexity. The answer to our inquiry was, Yes!
Our work led us to a model that is 35% equities and 65% income securities, with specific parameters in each asset class. We tested this model using mutual funds in the proper proportions going back to 1990. The funds gave us real portfolios, real expenses and real returns. The time period gave us two very challenging markets; 1994 with stocks slightly down and a plunging bond market, and 1995 to 2002 which was the dot com bubble and burst. We crafted two models; one for domestic and one for international clients.
The domestic model’s result was a single down year, 1994, off a bit over 2%, and all the other years showing positive returns. The model’s average annual return is over 9.5% with a standard deviation of about 5.5%. The international model yields similar results.
Thus, the model indicates over 80% of the return of the S&P 500 with about a third of the risk.
This portfolio is of great interest to risk averse individuals, corporations and institutions.