GLOBAL – A lack of knowledge and understanding of how hedge funds work is deterring investors from using alternative investments to diversify their portfolios or reduce volatility, says Baring Asset Management (BAM).

BAM says that though the hedge fund industry has witnessed growth among institutions, when used properly and with effective risk control, hedge funds can provide investors with several advantages not found in conventional funds. According to BAM, hedge funds have little correlation to the stock and bond markets because the point of the hedge fund is not to outperform a give index or benchmark, but to use short selling, hedging and arbitrage techniques to reduce market risk.

Says Ronald Watt, head of investment companies at BAM: “There is a great variety of funds, many of which are conservative and risk adverse. But many investors only remember higher risk funds involved in global macro trading or cross border interest arbitrage. In fact a hedge fund is a catch-all name for a varied universe of funds, fund strategies and approaches ranging form highly aggressive to conservative.”

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