Investing.com -- Hedge funds have shown their value in protecting portfolios during times of significant market volatility, as seen in August 2024.
The volatility index surged, and global equities experienced sharp sell-offs, with the U.S. 60/40 portfolio declining by 3.1% in just three days, according to UBS analysts.“However, early August brought market jitters against a backdrop of thin liquidity due to weak US jobs and manufacturing data, sparking concerns of a"hard landing.," the analysts said.
Convertible arbitrage strategies, which benefit from long volatility profiles, gained 1.1% in August by capitalizing on sharp reversals in market sentiment. By taking contrarian positions—buying undervalued assets or shorting overvalued securities—hedge funds can profit as prices revert to their natural averages once markets stabilize.
Hedge funds, however, are designed to exploit inefficiencies in the market and take advantage of price dislocations, rather than simply riding broader market movements. Given these factors, UBS recommends that investors incorporate hedge fund strategies into their portfolios to prepare for future volatility.