The Role of Hedge Funds in a World of Lower Returns

Abstract

From current valuation levels, it is implausible that stock or bond investors can see long term returns above about 3% to 4%. Indeed, if there is any “reversion to the mean,” returns could be a good deal worse. However, in any market environment, there are interesting ways to make money. TIPS, timber, absolute return strategies, arbitrage strategies, and several categories of hedge funds may produce far better returns than stocks or bonds. If all investors seek these opportunities, the opportunities will vanish. But, for the select few who are prepared to venture away from the crowd, there are (and always will be) opportunities for solid profits. This is the role that many hedge funds may serve in the years ahead.