Alternative Funds Definition
The term “alternative funds” generally refers to mutual funds, hedge funds, or Exchange-Traded Funds (ETFs) that invest in non-conventional investment securities, which may call them as securities other than stocks, bonds, and cash. Alternative funds may invest in real estate, loans, commodities, and unlisted securities, such as art or jewelry. Investing in alternative funds? Why not?!
Strategies to invest
Alternative funds are most commonly used for portfolio diversification strategies because performance for alternative investments typically has a low correlation to that of the broad market indices, such as the S&P 500 index. Some alternative funds may have focused investment strategies, meaning that they invest in one area, such as commodities. Other alternative funds may invest in a range of alternative investments.
Alternative mutual fund strategies tend to be more complex than conventional mutual fund strategies.
For example, alternative funds may invest in securities that are understandable, such as derivatives, currencies, or distressed bonds. Alternative funds may also seek to achieve returns above market averages or they may seek to achieve “market neutral” or “absolute returns” by using a combination of long and short strategies.
Bottom Line on Investing in Alternative Funds
Alternative funds are not for every investor. They typically have higher market risk, higher expenses, and higher minimum initial investments than the average mutual fund or ETF. Investors wanting to diversify can achieve similar results by building a portfolio with funds in different categories, capitalization, and assets. They may also diversify into focused areas, such as industrial sectors.
Investors may also choose mutual funds or ETFs that incorporate alternative securities or strategies into their portfolios. Although alternative funds are not necessary for diversification, and there is no need to achieve returns that exceed broad market averages, investors may use them properly if the investor uses caution and does their research before investing.
Source: the balance
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