Five core ‘alternative’ assets: Everything you need to know

A derivative of global macro strategies is the global tactical asset allocation strategy. This looks to take advantage of short-term misprices of markets rather than individual securities.

Relative value

This type of hedge fund takes advantage of relative mismatches in price between investments, in other words, they arbitrage. Investment managers can use fundamentals or quantitative analyses to identify mispricing.

• Fixed income arbitrage: exploit pricing inefficiencies between related fixed income securities.

• Equity market neutral is a popular strategy and it exploits differences in equity prices by being long and short typically within the same sector or industry.

• Long/short strategies buy securities and sell the same as long/short equity but in credit markets instead of equity markets.

• Volatility arbitrage looks for differences in the implied volatility.

• Yield alternatives: non-fixed income arbitrage strategies based on the yield instead of the price.

Others

Fund of hedge funds are similar to fund of funds in that they provide a diversified portfolio of different underlying managed fund or portfolio usually single asset or strategy, albeit in hedge funds.

Multi-strategy funds are hedge funds, similar to the multi-asset funds that advisers are used to, but use a combination of different strategies to reduce market risk.

130-30 funds were popular, with a number being launched in the UK prior to the financial crisis. They are equity funds with 130% long and 30% short positions, leaving a net long position of 100%.

Risk parity funds look to provide the same risk profile as a balanced portfolio, investing in a large range of assets but with a greater return potentially borrowing money against the holdings – leveraging the portfolio.

Trend following funds work on the principle of identifying swings in trends, or major changes in markets, as or just before they happen.

Alternatives are more than an alternative

In looking for different ways to either generate income or diversify away specific risk, or both, alternative investments provide investment managers with a wide variety of assets to use. There are obvious benefits to their use, especially if there are reasons not to use traditional assets extensively.

However, the complexity and diversity of alternatives means that even experienced investors need to exercise caution and adopt strict due diligence processes. Despite this, it looks like alternatives are indeed becoming mainstream.

Frank Potaczek is head of insight and consulting (fund management) at Defaqto