Investment Product Review

 

In this series we examine investment products and strategies, from the mundane to the highly complex, explaining how they work and why we do or do not use these particular products or strategies in our portfolios.

An Introduction to Alternative Strategies – Part 1

The majority of mutual funds and ETFs utilize “traditional” investment strategies, buying and selling common stock and fixed income securities.  However, in the wake of the tech bubble of the late 1990’s and the Financial Crisis of 2008, “alternative” strategies have become increasingly popular.  The exact definition of an alternative is somewhat imprecise, sometimes asset classes like REITs and commodities are considered to be alternative assets.  For our purposes, we will focus on the strategies employed by many hedge funds (as well as an increasing number of mutual funds and ETFs) designed to generate “alpha”, or risk-adjusted return greater than what would be expected by that fund’s market exposure1

Alternative strategies employ techniques (short sales) and types of assets (derivatives and non-public securities) not generally used by most funds.  Alternative funds also can have a variety of investment mandates ranging from fairly narrow (merger arbitrage) to extremely broad (global macro).  Perhaps most importantly, these strategies can use leverage, introducing significant risk considerations.  This series of articles will highlight several of these strategies and examine how they intend to create alpha. Further, we will analyze the potential risks and benefits of these approaches.  The ultimate goal of these posts is to shed some light on a somewhat esoteric set of investment styles, and to provide insight on what role they should or should not play in a diversified portfolio.

The alternative strategies that will be covered in this series include:

  • Directional
  • Market Neutral
  • Relative Value
  • Event Driven
  • Distressed Securities
  • Global Macro
  • Managed Futures
  • Multistrategy/Fund of Funds
  • Risk Parity
References
1. While many active funds attempt to add alpha through traditional strategies (i.e., by picking individual stocks or bonds), those will not be the focus of this series.

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About Erik Lehr

Erik graduated from the University of Oregon with a Bachelor of Economics and Mathematics degree. His background includes master’s degree in economics and a Master of Science in Computational Finance and Risk Management from the University of Washington. Erik also holds the Chartered Alternative Investment Analyst (CAIA®) designation.

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  1. Alternatives: Market Neutral Strategies - Part 3 » Empirical Wealth Management - February 5, 2014

    […] Introduction to Alternative Strategies […]

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