By Dimitris N. Chorafas (auth.)
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Alternatively, geared instruments can easily lose more in adverse markets, and gain less in favourable markets, than the stock and bond assets underlying the derivatives. Executives of SAIVs whom I questioned on this matter have not been able to convince me that their offerings provide sufficient diversification to traditional portfolio holding. Nothing guarantees they will be successful in the future, or be able to avoid substantial losses. ’ First things first. To be convinced, I need proofs.
37 The fact that stock exchanges around the globe are considerably correlated means that diversification through equity investments is no longer possible to the same degree, if at all. Therefore, investors are drawn to the message put forward by those selling alternative investments, that they bring high returns and are uncorrelated. These are of course two different issues: ● ● The one does not necessarily imply the other. Neither are they telling much about risk and return resulting from diversification.
Secondary market, volatility, illiquidity. This is very biased towards the worst case scenario where the investor cannot retrieve money,’ said a reviewer. A worst case scenario is a legitimate, objective, and crucial way of evaluating risks (see also Chapter 8 on stress testing). Rather than considering Are Alternative Investments Inherently Risky? 43 it to be biased, hedge funds should proactively use expert systems and human judgements to do worst case scenarios every day. 6 Investors should further realise that due to the volatile nature of markets in which hedge funds and SAIVs trade and invest, the net asset value of shares, when redeemed, may vary substantially from their net asset value on the date a redemption request is submitted.
Alternative Investments and the Mismanagement of Risk by Dimitris N. Chorafas (auth.)