From a portfolio-diversification perspective, fixed-income investments are more relevant now than ever before since hedge funds are increasingly discrediting themselves.
The main argument for hedge funds--when they work as intended--has always been that they would reduce portfolio volatility because, although their returns would be lower than equity returns, they would have a lower volatility and a low correlation with equity returns.
That has always been the main argument for fixed income, too. The differences are (1) that fixed income has in fact provided more downside protection than hedge funds, and (2) that fixed income costs a small fraction of hedge funds.
CEM Benchmarking published a report last year summarizing the ACTUAL returns earned by more than 300 large U.S. pension funds on all of their investments, grouped into 12 asset classes, during the 14-year historical period 1998-2011. The report, sponsored by NAREIT (my employer), is available for download at https://www.reit.com/data-research/research/cem-benchmarking-defined-be….
The results are sobering, especially for hedge fund investors. The ACTUAL net total returns achieved in hedge funds averaged just 4.77% per year. That was less than all four categories of fixed-income investments, it was less than all three categories of equity investments, it was less than all three categories of real asset investments.
Yet hedge fund investment costs averaged 125 bps/yr, more than for any other asset class except private equity, while the investment costs for fixed income investments ranged from just 17.3 bps/yr (U.S. broad) to just 42.0 bps/yr (non U.S.).
CEM Benchmarking found that if the average pension fund had subtracted 1% from its hedge fund allocation and distributed it to the other asset classes, its net total returns would have improved by 2.1 bps/yr.
Compared to fixed income, hedge funds have produced substantially lower net total returns, substantially higher volatility, substantially worse drawdowns, and substantially higher correlation with equity investments, all while costing roughly 100 basis points more per year. That's a terrible deal.
If you want lower asset-level volatility, stick with fixed income.