The alternative investment industry includes hedge funds, funds of funds, managed future funds and others. Alternative investments are unconventional investment products, unlike other investments which generally focus on assets like property, cash and stocks.
According to Managed Fund Association, “Alternative investment managers are distinguished by their objective to deliver absolute returns, regardless of market conditions. Using strategy-driven and research backed investment methodologies, alternative managers aim to provide broad asset diversification benefits such as lowered volatility (risk) and the potential for improved performance.”
What, then, are the strategies that MFA is referring to for hedge funds and other alternative fund strategies? The investing strategies most commonly used by alternative funds are:
• Global Macro:
This strategy is often used by global hedge funds. Managers analyze economic situations, using quantitative and fundamental approaches, over both long and short periods of time. They then use the data to predict market changes and invest accordingly.
• Event Driven
In event driven strategies, investment managers often keep positions in other companies involved in dealings such as mergers, shareholder buybacks, restructuring, financial struggles and other major adjustments. These strategies focus on fundamental characteristics, instead of quantitative, as well as more detailed future developments. These funds keep a finger on the pulse of equity and credit markets, as well as individual corporate changes.
• Relative Value
Managers base their actions on inconsistent valuation in the relations between several securities. Both fundamental and quantitative techniques are used, though investments cover wide ranges of assets, including equity, fixed income, derivative and others. Positions do not focus on the outcome of corporate transactions, but on pricing discrepancies recognized in related securities.
• Equity Funds
In equity funds, managers hold both long and short positions in both equity and equity derivative securities. Techniques include both quantitative and fundamental approaches, and the strategies can be either diverse or more specifically focused. Equity funds can also differ widely in net exposure levels, leverage employed, valuation ranges, holding periods and more.
• Quantitative Funds
These funds shift positions according to computer models which use complicated algorithms to identify investment opportunities. As the computer can process great amounts of variables, quantitative fund models are often used in other hedge fund strategies as well.
• Managed Futures Trading
Also known as commodity trading advisors (CTAs), managed futures invest in over one hundred global markets. They trade in products ranging from produce to precious metals, stock indexes, currencies and government bond futures. These funds are able to go long and short, and are therefore able to generate returns in both rising and falling markers. CTAs are regulated by the Commodity Futures Trading Commission as well as the National Futures Association.
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