Asset Allocation Changes May Add More Value than Stock Selection in Hedge Funds, According to Mellon Capital Management

BNY Mellon Boutique Points to Timely Changes as Most Valuable Part of Investment Process

Skill in adjusting exposures to various asset classes over time could be the most valuable part of the investment process for hedge funds and is likely to add more value than either selecting securities or maintaining a static equity exposure. That is the key finding from a recent white paper from Mellon Capital Management Corporation, part of BNY Mellon Asset Management.

"Of the three components, adept asset allocation can be the most important," said Eric S. Goodbar, hedge fund strategist for Mellon Capital, who co-authored the paper with Karsten Jeske, Ph.D., a senior quantitative analyst at Mellon Capital. "Well-timed asset allocation decisions can lower the correlation of the hedge fund's performance to stocks or bonds. Unfortunately, many hedge fund portfolios have a sizeable static allocation to equities, which increases the correlation of the hedge fund portfolio with the performance of equities."

Hedge fund managers who lower the correlation of their investment portfolio to the performance of traditional equity investments are more likely to avoid worse performance in down markets than those maintaining a static equity exposure, according to the paper.

Jeske said, "We believe raising the impact of asset allocation and lowering the static exposures to stocks and bonds can reduce the risk in the portfolio and position it so it better reflects the skills of the portfolio manager instead of mirroring the moves of the markets."

Founded in 1983 by innovators in the investment management field, Mellon Capital Management Corporation applies a disciplined and analytical approach to global investment management strategies. As of September 30, 2010, the firm had $191 billion in assets under management, including assets managed by dual officers of Mellon Capital Management Corporation, The Bank of New York Mellon and The Dreyfus Corporation, and $9.2 billion in overlay strategies. It is part of BNY Mellon Asset Management, one of the world's largest asset managers.

BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.