As promised in my most recent blog on alternative investment strategies, my next few blogs will describe some of the most popular alternative investment types available.
Long/Short Equity Funds
This type of fund combines a core group of long stock positions with short sales of stock or stock index options and futures. The fund managers take a long position in stocks they believe will go up, and sell stocks short that they think will decrease in value. Because the fund invests in both investments anticipated to go up and investments anticipated to go down, this type of fund is far less correlated with the overall market than a long only fund.
Master Limited Partnerships (MLPs)
MLPs are publicly traded partnerships. They have become more and more popular as investors have looked for income to replace their mid-term and long-term bonds, which are projected to continue to decline in value over the next several years. There are currently approximately 120 MLPs trading on major exchanges. Most of them engage in various types of oil and gas activities, like processing, natural gas compression, pipelines, storage and refining. They currently offer an attractive annual yield, averaging 5.7% (Source: Bloomberg as of 06/28/2013). In addition, their 10 year total return is 353%, which compares to 186% for REITs, 114% for the Dow Jones Industrial Average and 102% for the S & P 500 (Source: Bloomberg as of 06/28/2013).
Managed futures are another alternative investment designed to diversify a portfolio. Fund managers trade commodity, currency and financial futures typically using trend-following models and sometimes fundamental economic analysis. Managed futures funds tend to perform well in adverse market conditions for stocks and bonds. As a result, they reduce portfolio risk and volatility since they are negatively correlated with stocks and bonds.
I’ll be blogging on more alterative investment types over the next several weeks. If you would like more information about how alternative investment strategies can help to diversify your portfolio, give me a call!