Hedge Fund Investors Risk Study
Study Finds Investors Chase Returns Regardless of Risk
According to a new study, investors in hedge funds will pursue good returns no matter what and therefore, the study suggests, strong regulation is needed to protect these investors and to prevent systemic risk. This study finds that investors chose hedge funds and their strategies irrespective of risk, and therefore supports the type of stiff regulation in the European Union's Alternative Investment Fund Managers directive.
The research, conducted by European School of Management & Technology and the Rotterdam School of Management, found that investors pile into investment styles that have performed well over the last three quarters regardless of whether they are taking on higher risks.
Not only does this focus a disproportionate amount of capital in a limited amount of styles and force up the price of overheated securities, but the volatility of hedge fund styles means that strategies that have performed most strongly in the recent past often go on to underperform other styles in subsequent months.
"This research acts as a cautionary tale about falling into the age-old trap of trusting to past performance," said Guillermo Baquero, an author of the research, which is the first to focus on style, or strategy-based investing rather than investors rewarding the performance of individual funds or managers.
"The fact that investors appear unable to recognise the risks of different styles and chase performance at all costs could leave them vulnerable and unprotected," Baquero said. Source
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