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Beginner x27 s guide to hedge funds and other alternative investments

Beginner's Guide to Hedge Funds and Other Alternative Investments by Kelly Hollingsworth August The dismal performance of the U S stock market in the last few years makes now an especially good time to learn about and consider alternative investments for a portion of your portfolio This article does much more than merely de ?ne the term ??alternative investment ? It gives traders and investors a whole realm of guidelines in making choices for managers Further it puts forth red ags and conversely things about which there ? s no need for worry So What Is an Alternative Investment Although participants in the alternative investments industry might argue over the nuances of an exact de ?nition the term ??alternative investment ? generally refers to any investment in which successful performance does not depend on continued upward movement in the stock market In uncertain times alternative investments if understood and handled properly can make a big di ?erence in the performance of an investor ? s overall portfolio Some people describe alternative investments as ??absolute return ? strategies In essence that means investment strategies that should perform well each year whether the stock market goes up down or sideways That ? s not to say that alternative investments always make money ??clearly they don ? t because they must assume risk in order to generate a return However a continued decline in the stock market should not present a material risk for a true alternative investment strategy If you ? ve dabbled in futures options or shorting stocks you ? ve likely participated in an alternative strategy If your experience was like most you probably suspect this sort of thing is best left to the experts Alternative investment managers such as hedge fund managers and commodity trading advisors are people who will manage your assets pursuant to an alternative strategy Some investment managers are experts and some are not and it can take years to learn to tell the di ?erence However keeping an eye out for the following red ags is a good place to start Watch out for correlation to the stock market this correlation is known as beta If a manager is up when the stock market is up and down when the stock market is down the strategy is not alternative and will not provide you with diversi ?cation from the traditional investments in your portfolio Avoid managers who generate volatile performance Volatile managers may generate positive returns each calendar year but within the year they show big positive months Cand big losing months If you invest with a volatile manager shortly before a large losing or ??drawdown ? period it might take the manager months or years to recover the loss and generate a pro ?t for you ??if it happens at all Better managers generate smooth returns over time never making or losing much in any one month With these managers you should not have to worry about the timing of your investment Look closely