Alternative Strategies
The universe of alternative investments can be complex and are often
misunderstood. Not all alternative strategies are the same and each has
unique characteristics that may result in out-performance or
under-performance in various market conditions.
Roll over the categories below to see their definitions.
Alternative Investment Strategies
Hedged Strategies
Private Investment Strategies
Opportunistic
Equity
Enhanced
Fixed Income
Absolute
Return
Tactical
Trading
Private Investments
Long/Short
Equity
Distressed
Securities
Equity Mkt.
Neutral
Commodities
Real
Estate
Buyouts
Energy &
Natural Res.
Short
Equity
Global/Emrg.
Market Debt
Convertible
Arbitrage
Global
Macro
Growth
Capital
Long/Short
Sector
Structured
Credit
Fixed Income
Arbitrage
Managed
Futures
Venture
Capital
Long/Short
International
Long/Short
Credit
Statistical
Arbitrage
Private Debt
Leveraged
Loans
Event Driven
Special
Situations
Opportunistic Equity
Opportunistic investing in a broad grouping of different strategies and techniques that all have the similar trait of allowing the investment manager to seize an advantage in knowledge, research, temporary pricing anomalies, or market-specific inefficiencies to generate profit.
Enhanced Fixed Income
These strategies utilize global fixed income investments that may potentially offer high yields with little correlation to traditional, domestic fixed income investments. The universe typically includes global sovereign, corporate, high yield and distressed bonds, as well as bank loans.
Absolute Return
Absolute Return investors seek to produce positive returns regardless of the direction of general markets. Hedge funds target absolute returns versus mutual funds, which typically target returns relative to a benchmark.
Tactical Trading
Tactical trading strategies generally speculate on the direction of market prices of commodities, equities and bonds. Often times managers will combine long and/or short positions within each strategy to maximize returns.
Private Investments
Investments typically made in private or public companies through privately negotiated transactions. Private investments may be structured using a range of financial instruments, including common and preferred equity, convertible securities, subordinated debt and warrants or other derivatives, depending on the investor's strategy and the company's financing requirements. The fund's investments are usually realized, or "exited," after four to seven years through a private sale, an initial public offering or a recapitalization.
Long/Short Equity
Going long/short publicly traded equities with an opportunistic, value, and/or growth focus.
Distressed Securities
Focuses on being long and/or short the bonds of a company trading at a steep discount to par. This strategy involves intense analysis of credit quality and the likelihood of a restructuring.
Equity Market Neutral
Close relative of Long/Short Equities because it takes offsetting long and short positions in similar mispriced securities, however, the degree of systematic risk is negligible in that its returns are a result solely from relative changes in the prices of their positions.
Commodities
Bulk goods, such as grains, precious and industrial metals, livestock, oil, cotton, coffee, sugar and cocoa. Commodities are typically bought and sold in the futures markets, where producers combine with manufacturers and speculators to create a liquid market. Commodities are often viewed as a hedge against inflation because their price rises with the consumer price index.
Real Estate
Private investments in real estate are portfolios of property, often diversified by property type, region and size. Over long periods of time, Real Estate holdings should provide protection against unanticipated increase in inflation, exhibit low volatility and low correlations to both equities and bonds, and offer high levels of current cash flow (income).
Buyouts
Equity-like investments in public or privately owned companies using leverage, or borrowed funds, to purchase a significant portion or majority control of their ownership. Buyouts usually involve stable, well-established companies with relatively predictable cash flows.
Energy & Natural Resources
Investing in different strategies related to energy and natural resources, including exploration, production and transportation of oil, gas and other fuel sources. Natural commodities, such as precious metals, industrial metals, timber and other agricultural products, are incorporated into this strategy as well as clean technology, renewable energy technologies, and other alternative energy sources are an important constituent of this strategy.
Short Equity
Focuses on being net short publicly traded equities.
Global / Emerging Market Debt
Investments in fixed income securities that are sourced from a global opportunity set, especially sovereign, corporate and high yield debt securities from emerging market countries. These bonds can offer higher returns and higher volatility, with very little correlation to domestic markets.
Convertible Arbitrage
Purchase of a corporation's convertible (to equity) debt while simultaneously shorting the equity. The aim is to capture income as well as profit from changes in the relative values of the debt and equity.
Global Macro
Top-down approach focusing on global macroeconomic shifts. Outright and derivative positions are taken in a country's equities, bonds, or currencies.
Growth Capital
Growth capital investments are often used for specific expansion plans, such as rolling out a new product line, enhancing a sales force, acquiring a complementary business, etc. Companies that receive growth capital investments are usually profitable and self-sustaining, but need an extra boost of capital for additional growth.
Long/Short Sector
Going long/short publicly traded equities with an opportunistic, value, and/or growth focus in a specific sector, such as healthcare.
Structured Credit
A strategy that invests in tranched securities issued by synthetic collateralized debt obligations by creating custom securities to go both long and short credits.
Fixed Income Arbitrage
Strategies that aim to profit on pricing differences between related debt securities within or across different corporations or governments.
Managed Futures
A strategy that entails trading global equities, currency, commodity, and debt markets using futures either on a systematic or discretionary basis.
Venture Capital
Minority investments in new and emerging companies are usually broadly classified as venture capital. Such investments are often in companies that are small, underdeveloped and often have products or services that are not yet proven or accepted in the marketplace. Venture capital funds may finance companies throughout development or focus on certain phases of development (usually classified as seed, early stage, or late stage).
Long/Short International
Going long/short publicly traded equities with an opportunistic, value, and/or growth focus in a geographic region, such as Europe.
Long/Short Credit
A strategy that focuses on being long or short debt securities.
Statistical Arbitrage
This strategy tries to profit from temporary pricing discrepancies between related securities. This irregularity offers an opportunity to go long the cheaper security and short the more expensive one. As the prices of the two revert to their norm, or mean, gains can be realized.
Private Debt
Investments in debt securities of privately held companies. The most common form are mezzanine funds, however other strategies include venture lending and senior debt funds. Mezzanine debt investments exhibit characteristics of both debt and equity, and typically command higher interest payments than senior debt.
Leveraged Loans
Corporate bank loans of below investment grade issuers, typically yielding floating interest rates based off LIBOR. These loans are usually senior secured obligations at the top of an issuer's capital structure.
Event Driven
A strategy to exploit pricing inefficiencies caused by specific corporate events. Merger and risk arbitrage aim to capitalize on the mispricing of the equity or debt of a company going through a corporate event.
Special Situations
Opportunistic investments in privately negotiated transactions that generally do not fit any of the sub-strategies described herein are considered Special Situation investments. A common form of Special Situations private equity investing is distressed for control investments, which are investments in the debt or equity of a company experiencing operational or financial distress with the intention of securing control of the business and restructuring its operations.
Loan Origination
A strategy focused on underwriting loans. Loan origination includes the screening, processing, and negotiation of debt between two or more entities.
Multiple Strategies are Needed For Diversification
The quilt below illustrates how hedged strategies and private investments have performed since 1999. By allocating to multiple strategies and multiple managers, you may be better positioned to preserve capital and increase your portfolio value over the long term. Click here to download this quilt.
| 1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
| 286.37 |
22.61 |
13.37 |
10.27 |
39.36 |
25.45 |
26.84 |
28.96 |
24.92 |
5.24 |
60.17 |
19.82 |
| 55.86 |
18.02 |
13.28 |
9.05 |
29.56 |
18.89 |
21.04 |
24.26 |
19.83 |
4.83 |
40.25 |
15.06 |
| 44.22 |
14.56 |
12.18 |
7.44 |
28.68 |
18.42 |
10.6 |
17.66 |
15.6 |
-5.37 |
28.14 |
13.5 |
| 38.13 |
14.5 |
10.36 |
5.44 |
25.33 |
15.34 |
9.3 |
15.94 |
11.11 |
-5.92 |
26.46 |
13.35 |
| 31.29 |
13.41 |
8.92 |
5.28 |
22.97 |
15.01 |
8.27 |
15.79 |
10.48 |
-16.33 |
25.81 |
12.12 |
| 26.47 |
11.63 |
8.42 |
3.7 |
21.42 |
10.88 |
7.49 |
15.33 |
10.25 |
-18.04 |
25.04 |
11.86 |
| 24.33 |
9.09 |
6.87 |
1.02 |
20.54 |
9.03 |
7.29 |
14.24 |
9.96 |
-19.03 |
24.57 |
11.44 |
| 21.04 |
6.74 |
6.71 |
0.98 |
19.55 |
7.68 |
7.22 |
12.89 |
8.94 |
-21.37 |
19.98 |
11.43 |
| 17.62 |
4.98 |
4.62 |
-0.87 |
11.61 |
6.86 |
6.79 |
12.37 |
7.05 |
-21.82 |
13.07 |
10.45 |
| 16.94 |
4.07 |
2.8 |
-1.45 |
9.93 |
5.58 |
6.25 |
12.17 |
6.96 |
-21.85 |
11.65 |
10.25 |
| 14.73 |
3.04 |
2.76 |
-4.3 |
9.72 |
4.63 |
6.22 |
11.71 |
6.61 |
-25.2 |
11.47 |
8.06 |
| 14.41 |
2.78 |
0.4 |
-4.71 |
7.47 |
4.34 |
6.02 |
10.39 |
5.49 |
-26.65 |
5.93 |
6.56 |
| 14.34 |
1.97 |
-11.46 |
-7.87 |
4.11 |
4.15 |
4.91 |
8.15 |
5.33 |
-33.73 |
4.34 |
5.7 |
| 7.09 |
-9.11 |
-11.88 |
-22.1 |
2.44 |
4.08 |
2.43 |
7.32 |
5.29 |
-37 |
2.73 |
4.6 |
| -0.83 |
-10.71 |
-39.46 |
-32.74 |
-3.8 |
1.18 |
-1.86 |
4.33 |
5.08 |
-37.26 |
1.43 |
2.85 |
Barclays Aggregate Bond Index
Cambridge Associates LLC U.S. Private Equity Index
Cambridge Associates LLC U.S. Venture Capital Index
HFRI Emerging Markets Index
HFRI EH - Equity Market Neutral Index
HFRI ED- Distressed-Restructuring Index
HFRI ED - Merger Arbitrage Index
HFRI Fund of Funds Composite Index
HFRI Fund Weighted Composite Index
HFRI Relative Value Index
HFRI RV Fixed Income-Convertible Arbitrage Index
Learn more about Implementing Alternatives in your portfolio.