deliver unfavorable results. At Commerce Trust, our research teams of highly trained analysts are behind the scenes performing hedge fund due diligence and working with your portfolio manager to identify the best hedge fund solutions for your portfolio. CONCLUSION We believe that a well-diversified, moderate allocation to hedge funds can enhance diversification and reduce volatility in a portfolio. A thoughtful allocation to hedge funds can act as portfolio ballast in times of stress in the equity markets. This feature is particularly useful in periods of low bond yields, when large allocations to fixed income are relatively unattractive and equity volatility remains the largest source of portfolio risk. However, each hedge fund strategy has its own risk profile, with risk factors including the uncertainty of strategy returns, possible style drift, execution risk, and potential changes in management or investment staff. Ongoing due diligence and broad diversification across managers and categories are essential for mitigating these risks. DISCLOSURES This overview is provided by Commerce Trust Company, a division of Commerce Bank, and is strictly for general informational purposes only. Investors should carefully consider the investment objectives, risks, charges and expenses of this fund. This and other important information is contained in the fund’s prospectus from your financial professional and should be read carefully before investing. Commerce Bank does not provide tax advice. Please contact your tax professional to review your particular situation before investing. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document. Past performance does not guarantee future results, and information provided is not to be construed as solicitation to buy or sell any particular security. Diversification does not guarantee a profit or protect against all risk.
HYPOTHETICAL RETURN/RISK OF A PORTFOLIO
EXPECTED RISK (STANDARD DEVIATION)
ROLE IN A PORTFOLIO We believe the greatest benefit of employing hedge funds in a portfolio is potential risk reduction. The majority of volatility in most traditional portfolios is from the equity component, and hedge funds (and many other alternative investments) typically exhibit low correlations to stocks. This means they have a distinct return pattern and do not depend on the direction of equity (or bond markets). This independent return stream can potentially act as a buffer or add to a portfolio’s relative returns when markets decline. Hedge funds can also provide an alternative source of returns that is less sensitive to interest rate moves than either equity or fixed income. As a portfolio diversifier, hedge funds can smooth returns during volatile markets. When used as a complement to a balanced portfolio, hedge funds can improve the portfolio’s overall efficiency (lower risk for a given level of returns). THE IMPORTANCE OF DUE DILIGENCE As with all investments, hedge funds carry risk. The particular underlying hedge fund strategy may be poor, or the manager may not execute well an otherwise good strategy. From time to time, fraud in a hedge fund generates prominent headlines. Appropriate due diligence can uncover risks, helping investors to avoid hedge funds that may
Market Neutral: This investment strategy is often considered a subset of long/ short equity, as the most common form of market-neutral investing involves a strategy of investing 100% long and 100% short in order to hedge out all market moves but still capture the return spread between the long and short positions. There are multiple variations of this strategy that may involve relative value or arbitrage techniques to enhance returns or the use of index futures to hedge equity moves. The end goal is to create absolute returns while maintaining net zero exposure to the equity markets. These strategies are typically characterized by low risk and low return unless leverage is employed. Managed Futures: Managed futures strategies are a subset of the hedge fund universe and represent an alternative investment strategy in which professional managers use futures contracts instead of direct investments in stocks, bonds, commodities, or currencies. A managed futures strategy (either through a private fund, mutual fund structure, or separate securities) takes long and short positions in futures contracts and options on futures contracts while holding the investors’ underlying assets inmoney market accounts or short-term government securities. These managers typically use mathematical models to seek price trends (either positive or negative) in various futures contracts.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Commerce Trust Company is a division of Commerce Bank.
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