Alternative funds are collective investment vehicles in which investors money is pooled and managed using alternative fund management strategies. These strategies can be very sophisticated, such as long/short, absolute return, and arbitrage, or can be focused on a certain goal, such as investing in alternative energy to promote green energy, or only investing in investments which align with a certain faith or religion.
Not Just Stocks and Bonds
Alternative funds may invest in traditional assets such as stocks and bonds, but, in many instances, make use of alternative asset classes. These alternative assets include commodities, currencies, private equity, real estate, venture capital, and financial derivatives. The benefit of these asset classes is that they help diversify a portfolio, usually having a low correlation with other asset classes. They tend to be less liquid than traditional asset classes, therefore have the potential to sustain greater losses, however, managers of alternative funds usually attempt to diversify their investments so as to smooth out the returns of these volatile asset classes.
An example of a kind of alternative fund that implements sophisticated alternative fund management strategies is a hedge fund. Hedge funds use strategies such as long/short, absolute return, and arbitrage in order to produce returns regardless of the rest of the market and also to attempt to capitalize on market inefficiencies. These types of alternative funds are usually only available to large investors, as there are usually very high minimum investment requirements that keep small investors from access to hedge funds. However, mutual and exchange traded funds have arisen which seek to mimic the returns of different hedge fund strategies, which now allow small investors to invest in the same strategies as a hedge fund.
The fees for alternative funds are usually higher than that of traditional funds. This is justified by the sophisticated, specialized nature of the fund management, as well as the ability to produce superior returns.