Some have argued that there is an accelerating convergence between the hedge fund industry and traditional institutional fund management. This article will argue the opposite: that in a very fundamental way, these two investment industries are still quite distinct. This article will argue that the differences between traditional investment programs, which are designed around outperforming benchmarks, and alternative investment programs, which are designed to deliver absolute returns, mainly result from competing views on sources of investment returns. These competing views then result in differing: investment processes; risk management practices; and roles for financial service providers. This article will also maintain that the differing types of absolute-return programs result from varying investor preferences in return-to-risk trade-offs. One can summarize the competing views on sources of investment returns as follows: asset allocation is the dominant performance driver; absolute returns should be expected from each investment; and a hybrid view.
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