The use of alternative investment strategies by Active fund managers are on the increase. Alternative investment returns tend to have low correlations with traditional investments (Equity, Bonds, Cash & Deposits) over long periods. Alternatives are often held as part of a portfolio with the view to smoothing investment returns and reducing an investor’s exposure to volatility. The following are examples of some strategies used within funds:
Hedge Funds – There are a wide variety of strategies that Hedge Fund Managers can employ, some of which can be high risk. Generally Hedge Funds or Absolute Return Funds aim to provide a positive return in all market conditions. Some Fund Managers use strategies that would not be used in traditional long only investment funds. Hedge fund managers can opt to use long and short positions. This means they can provide a positive return even if equities go down in value. Hedge fund returns tend to outperform global equities in down equity markets and lag the returns of global equities in up equity markets.
Property – Property Investment can provide income in the form of rents and possible capital appreciation at the point of sale. Property can provide diversification benefits to an investor’s portfolio and a potential act as an inflation hedge as rents and real estate values tend to increase in times of inflation.
Commodities – Commodities are physical goods such as grain and gold. Derivatives are often used by fund managers to gain exposure to commodities. Futures, forwards, options, and swaps are all strategies used to gain exposure to commodities through derivatives. Returns are based on changes in price and not from income streams from the assets themselves. Commodity prices tend to move in line with inflation rates, holding commodities can act as a hedge against inflation risk.
Traditional assets have become more correlated in recent times (positive change in bonds will also see a positive result in equity markets and visa versa). The above strategies are being used in attempt to generate income within some funds to meet its investor’s needs and expectations. In an age of negative interest rate strategies fund managers are looking to alternatives to increase returns.
Should you have any queries in relation to your investment strategy please do not hesitate to contact us on 061 518365.