Hedge funds would become an increasingly popular investment tool in Hong Kong as investors looked to diversify their investment strategies, fund managers said yesterday. At a wealth management conference, Nobel Investments regional director Stewart Aldcroft said hedge funds could account for up to 20 per cent of a typical local investment portfolio within a few years. 'In recent years it has been the Swiss private banks that have really led the charge into hedge funds,' Mr Aldcroft said. Local institutional investors, such as the Hong Kong Jockey Club, had also moved into hedge funds, he said. Investment in hedge funds by Hong Kong institutional investors 'is still not as large as in the US', where about 35 per cent of hedge fund investors were institutions, he said. Hedge funds had been underused partly because of their image as high-risk instruments, but hedging by definition was designed to lower market risk, he said. Hedging strategies are effective for diversifying risk exposure because they build portfolios with a low performance correlation to discrete asset classes. Tim Schuler, regional head of CSFB's alternative capital division, said adding hedge funds to a portfolio did not necessarily make it any more or less risky. 'The whole purpose is to increase your risk-adjusted returns. Hedge funds push the risk-reward curve upwards,' he said. Mr Schuler said shifting just 10 per cent of an equity and fixed-income portfolio into hedge funds could raise annual returns from 1.8 per cent to 2.6 per cent. However, Mr Aldcroft and Mr Schuler said hedge funds would not outperform equity in a bullish market. But they can achieve returns in both rising and falling markets. There have been 24 months since 1998 in which a typical equity and bond portfolio was down by more than 1 per cent, while hedge funds generated positive returns in 14 of those months, Mr Schuler said. 'It's the power-positive compounding factor,' he said. 'Not giving the money away is how hedge funds accumulate money.' Both fund managers said the success of hedge funds was contingent on the skill of managers. Tracking of hedged sectors from 2000 to last year showed that the gap between best and worst-performing sectors was as much as 60 per cent, Mr Schuler said.