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"It sounds counter intuitive but there are good risk takers and bad risk takers" |
The study looked at the performance from July 2007 to March 2008 of 3,200 hedge funds and funds of hedge funds that had a track record since December 2004.
Investors typically select a fund based on previous returns. This means avoiding funds that have had abnormal return distributions and large drawdowns. Although this method eliminates extreme risk takers from a portfolio, it fails to detect "time bombs with hidden risk" says Riskdata’s chief executive, Olivier Le Marois. Indeed, selecting funds based on this method would have resulted in returns of just 0.4% for the July to March period.
Funds that experienced high drawdowns in their lifetime before the credit crunch and market turmoil that began last July actually performed better in the testing market.
"Staying away from managers that have had monthly drawdowns in the past results in forming a concentrated portfolio of funds with quiet returns and a good track record," says Le Marois. Although an investor might think that this is a safe bet, in fact many of these managers have been running strategies that relied on low volatility, and before July had not been tested as risk takers.
