5 MINUTE READ

Getting to know the alternative asset classes

After building a foundation of key terminology and mastering the differences between traditional and alternative investments, the next step is to dive deeper into the asset classes that are the building blocks of alternative investing.

Learn about what each strategy entails and how these asset classes contribute to building strong and resilient portfolios.

Did you know?

While these alternative strategies were historically only accessible through private funds, there is now a movement to democratize access to private markets for accredited investors as new products emerge. Watch this space, gurus.
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First stop: hedge funds

What do hedge funds do?

Hedge funds are pooled investment funds that trade relatively liquid assets and can be used as a diversification tool. The investment strategies can vary but typically seek to produce return while mitigating downside risk. Hedge funds often invest in public markets, and have the flexibility to employ alternative trading techniques to manage overall exposure, such as “short-selling”. By deploying various financial instruments or market strategies, hedge funds offset risks and provide downside protection1.

Some example strategies include:

Long/short equity: This strategy focuses on buying and selling stocks based on fundamental valuations. An example strategy is “paired trades”. Post crisis regulation in the US favors large banks over small banks, so a long position in a large bank and a short position in a small bank results in low/zero exposure to banks and a profit if the large bank outperforms and the small bank underperforms.

Event-driven: Event driven strategies, which can include special situations, opportunistic or other sub-strategies, look to capitalize on corporate events, such as announced mergers.

Multi-strategy hedge funds: Apply various strategies and implement diversification to smooth returns, reduce volatility, and decrease asset-class and single-strategy risks.

Extra credit for alts gurus:

The primary source of risk and return for traditional, actively-managed portfolios are market risk, and security selection. Hedge funds utilize market inefficiencies as their main source of return. Their primary source of risk is idiosyncratic risk, or the inherent risk involved in investing in a specific asset, such as a stock.
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Let’s recap

Hedge funds, private equity and private credit are three key asset classes in the alternatives universe. They provide portfolio diversification, help tap potential for growth and enable financing opportunities for investors and businesses.

Test your knowledge
Q. Which of the following is a private equity strategy?

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Dive into Module 3

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