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Understanding the Different Alternative Investment Styles & Strategies

Alternative investment strategies tend to be highly specialized and generally require the expertise and skill of an experienced money manager to exploit opportunities for profit. Different styles and strategies perform differently, and carry different sets of risks.

Hedge Funds

Hedge Funds - Hedge funds are privately offered investment vehicles. Hedge fund managers use skill-based trading strategies and there are few limitations on the markets, instruments and strategies hedge funds can employ.

Managed Futures - Managed futures are alternative investments that allow the investor to access the world's futures markets through the services of professional money managers known as commodity trading advisors (CTAs). Alternative investments utilize a diverse range of financial instruments and are flexible in their investment options. Many alternative investment managers are highly specialized and trade only in their area of expertise, while others focus on the advantage of trading a broad, diverse range of opportunities.

Hedge Fund Styles and Strategies

There are a number of ways in which alternative investment managers differ from traditional money managers. One of the most significant differences is the alternative investment manager's expanded scope of non-traditional investment instruments and techniques. While alternative investment managers employ a wide variety of different strategies or styles, they can be classified into six main categories:

Fund of Funds - Strategy Neutral; Strategy Specific
Fund of Funds is an important hedge fund style that allows investors, through a single investment, to access a variety of hedge fund managers - often for much less than typically required for direct participation in each of the underlying individual funds. This blending of different hedge fund strategies and asset classes aims to provide a more stable long-term investment return than any of the individual hedge funds. There are a range of funds of funds, which vary in the number of underlying managers (5 to 100), and the strategies on which they focus. Strategies vary from style-specific funds to those with a bias to a specific style, normally equity long/short, and those with a style neutral objective.

Equity/Long Short - Long/Short; Sector Specific
An Equity Long/Short hedge fund involves share based investing on both the long and short side of the market across a range of sectors, categories and regions. This is the largest sub-sector of hedge fund styles and tends to be more correlated to benchmark indices because of a bias towards net long market exposure.

Event Driven - Merger Arbitrage; Distressed Securities
Event Driven hedge funds seek to capitalize on market mis-pricings related to a specific event, such as a merger, restructuring or bankruptcy. Sub-strategies include merger arbitrage and distressed securities investing.

Managed Futures - Systematic Trend Following; Discretionary
Managed Futures is a hedge fund style that invests in futures and currencies on a global basis. The most common form involves the use of a systematic approach to trade a widely diversified range of markets and contracts based on identified trends.

Market Neutral/Arbitrage - Equities - Balanced; Convertible Bond Arbitrage; Fixed Income Arbitrage
Market Neutral/Arbitrage is a hedge fund strategy that takes offsetting positions in closely related financial instruments with the aim of exploiting disparities in pricing relationships. Sub-strategies include equities-balanced hedge funds, fixed income arbitrage hedge funds and convertible bond arbitrage hedge funds.

Other Strategies - Global/Macro; Emerging Markets
Other hedge fund strategies include Global/Macro and those focused specifically on Emerging Markets. Global/Macro hedge fund strategies seek to capitalize on country, regional and/or economic change affecting securities, commodities, and interest and currency rates by taking large directional positions in national markets based on a top-down analysis of macroeconomic and financial conditions. Asset allocation can be aggressive and this hedge fund style has been associated with a number of high profile individual managers.

View Interactive Performance Charts Showing Alternative Investment Strategies

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Alternative investment products, including hedge funds and managed futures, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Altegris, a FINRA and NFA member, offers various alternative investments, including hedge funds, futures funds and managed futures and commodities accounts, that may operate in commodities markets and foreign markets, among others. Altegris and/or its officers/partners may have a financial interest in such alternative investments. In working with clients, Altegris acts in its capacity as an SEC-registered Broker-Dealer and/or as a CFTC-registered Introducing Broker. Although Altegris may give advice that is incidental to its brokerage services, it is not an Investment Adviser. When acting as an Introducing Broker for individually managed accounts, Altegris receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. CTAs may also pay Altegris a portion of the fees they receive from accounts introduced to them by Altegris. When acting as a Broker-Dealer, Altegris enters into selling agreements with hedge funds and futures funds that it offers (including funds sponsored by affiliates), pursuant to which Altegris, with respect to the interests it sells, is paid a portion of the management and/or performance fees charged by the funds or their managers in respect of those interests. This enables Altegris to offer hedge funds, futures funds and individually managed accounts without charging fees above those charged by the CTAs, funds or managers.