Alternative Investments Alternative Investment strategies cover a wide range of asset management disciplines aimed at delivering absolute positive returns by exploiting market inefficiencies while minimising exposure and correlation to traditional equity and fixed income investments. The ultimate goal of Alternative Investment strategies is to improve the risk/return profile of an investment portfolio. Alternative Investment strategies do not focus on achieving performance relative to a specific benchmark or market index, but on capturing absolute performance with defined volatility. Private equity and hedge fund investing are considered to be Alternative Investment strategies. Convertible Arbitrage This strategy is identified by hedge investing in the convertible securities of a company. A typical investment is to be long the convertible bond and short the common stock of the same company. Positions are designed to generate profits from the fixed income security as well as the short sale of stock, while protecting principal from market moves. Dedicated Short Bias Dedicated short sellers were once a robust category of hedge funds before the long bull market rendered the strategy difficult to implement. A new category, short biased, has emerged. The strategy is to maintain net short as opposed to pure short exposure. Short biased managers take short positions in mostly equities and derivatives. The short bias of a manager's portfolio must be constantly greater than zero to be classified in this category. Emerging Markets This strategy involves equity or fixed income investing in emerging markets around the world. Because many emerging markets do not allow short selling, nor offer viable futures or other derivative products with which to hedge, emerging market investing often employs a long-only strategy. Equity Market Neutral This investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral, or both. Well-designed portfolios typically control for industry, sector, market capitalisation, and other exposures. Leverage is often applied to enhance returns. Event-driven This strategy is defined as equity-oriented investing designed to capture price movement generated by an anticipated corporate event. There are four popular sub-categories in event-driven strategies: risk arbitrage, distressed securities, Regulation D and high yield investing. 1. Risk Arbitrage/Merger Arbitrage Specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. Risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the two companies. The principal risk is deal risk, should the deal fail to close. 2. Distressed Securities Fund managers invest in the debt, equity or trade claims of companies in financial distress and generally bankruptcy. The securities of companies in need of legal action or restructuring to revive financial stability typically trade at substantial discounts to par value and thereby attract investments when managers perceive a turnaround will materialise. 3. Regulation D, or Reg. D This sub-set refers to investments in micro and small capitalisation public companies that are raising money in private capital markets. Investments usually take the form of a convertible security with an exercise price that floats or is subject to a look-back provision that insulates the investor from a decline in the price of the underlying stock. 4. High Yield Often called junk bonds, this sub-set refers to investing in low-grade fixed-income securities of companies that show significant upside potential. Managers generally buy and hold high yield debt. Fixed Income Arbitrage The fixed income arbitrageur aims to profit from price anomalies between related interest rate securities. Most managers trade globally with a goal of generating steady returns with low volatility. This category includes interest rate swap arbitrage, US and non-US government bond arbitrage. The yield curve arbitrage, and mortgage-backed securities arbitrage. The mortgage-backed market is primarily US-based, over-the-counter and particularly complex. Global Macro Global macro managers carry long and short positions in any of the world's major capital or derivative markets. These positions reflect their views on overall market direction as influenced by major economic trends and/or events. The portfolios of these funds can include stocks, bonds, currencies, and commodities in the form of cash or derivatives instruments. Most funds invest globally in both developed and emerging markets. Long/Short Equity This directional strategy involves equity-oriented investing on both the long and short sides of the market. The objective is not to be market neutral. Managers have the ability to shift from value to growth, from small to medium to large capitalisation stocks, and from a net long position to a net short position. Managers may use futures and options to hedge. The focus may be regional, such as long/short US or European equity, or sector specific, such as long and short technology or healthcare stocks. Long/short equity funds tend to build and hold portfolios that are substantially more concentrated than those of traditional stock funds. Managed Futures This strategy invests in listed financial and commodity futures markets and currency markets around the world. The managers are usually referred to as Commodity Trading Advisors, or CTA’s. Trading disciplines are generally systematic or discretionary. Systematic traders tend to use price and market specific information (often technical) to make trading decisions, while discretionary managers use a judgmental approach.