Greg Peacock, principal at New Zealand Assets Management, said the rationale for incorporating hedge funds into a portfolio was very strong.

“It’s a bit counter-cyclical given the headlines about the performance of hedge funds.”

He said while traditional asset allocation would see investors in bonds and equities, both seemed expensive at the moment.

“Building a portfolio that includes some diversified assets seems to be a sound thing to do. If nothing else, it makes it easier to hold on to more traditional assets when they have a difficult period. If you have something that is doing well it psychologically makes it a bit easier.”

He said research indicated that the returns from bonds and equities over the near future were likely to be lower than they had been in the past, which lowered the opportunity cost of holding hedge funds.

“It could be that hedge funds out perform bonds. They could play the re that bonds have played in portfolios in a diversification sense historically but doing forward they will do it with higher returns.”

He said it was traditionally hard for retail investors to get exposure to hedge funds because of the size of the amounts of money they had to invest. 

But he said some brokers had alternative sin their approved product list, or they could invest through a firm such as NZAM.

He said there had been a noticeable increase in people looking for something different. “You can see it in the institutional market where there is growing awareness of the bond and equity valuation issues.”

Craig Stanford, head of alternative investments, Morningstar Investment Management, said there was an opportunity for investors.

"The key problem with most portfolios--from the largest institutions down to the small mum and dad investors, is that they're overexposed to equities and equity-like risk,” he said.

"Even in a balanced portfolio, which has some exposure to fixed income and other things, say 60 to 70 per cent of capital Is allocated to equities, your actual equity risk is more like 90 per cent...because equities are so much more volatile than fixed income, at least three-times as volatile. "That's the key problem we see with most portfolios today…it makes sense to diversify some of that risk away.”

“You’ve still go to select the right hedge fund, but if you do you might get a better outcome than just bonds and equities,” Peacock said.