There are a variety of reasons to include hedge funds in a portfolio of otherwise traditional investments. The most cited reason to include them in any portfolio is their ability to reduce risk and add diversification.
The other primary reason for adding hedge funds to a portfolio is the ability of some hedge funds to enhance the overall returns of a portfolio. This objective can be considered in two ways.
The first way is to maintain a low-risk portfolio but to try to squeeze out some additional returns through the use of a low-volatility hedge fund, as described in the previous section. By adding a hedge fund strategy that substitutes for an otherwise anemic fixed-income return, the returns on a portfolio can be increased slightly without any increase in volatility.
Talk to your advisor to see if investing in a hedge fund is right for you.