Alternative Investment Types – Blog #2

As you may recall from my earlier blogs, the objective of alternative investments is to reduce the volatility of a portfolio by investing in products that are not highly correlated with stocks and bonds.

Here are a few additional types of alternative investments:

Merger Arbitrage

This is a strategy that involves the fund manager earning income by investing in the stock of one company that is being acquired by another company. For instance, if the stock of the company being acquired currently has a market value of $10.00, and the acquiring company has agreed to pay $11.00 for the stock, there is the potential for a 10% gain. The risk to the merger arbitrage fund is that the transaction doesn’t close for some reason. This is why it is important to invest only in funds with experienced managers who have a solid track record.

Private Equity

Private equity funds provide capital (debt or equity) to companies not listed on public exchanges. The purpose is to participate in the growth of emerging and growing companies through a long-term investment. Private equity is an illiquid asset class that offers the potential for greater long-term capital appreciation and diversification away from the public markets. It has generally only been available to higher net worth individuals (e.g., Mitt Romney and his firm Bain Capital), but now the average investor can invest in private equity via a number of ETFs and mutual funds.

Global Macro

Global macro is an opportunistic investment strategy that seeks to anticipate price movement in various asset types around the world. This type of fund can invest both long and short, in multiple asset classes, in markets around the world. As one of the most flexible of all alternative strategies, global macro managers have a broad investment mandate, allowing them to tactically allocate capital across a wide range of liquid global financial markets.

Private Real Estate Funds

These funds are similar to private equity, except they invest in real estate instead of companies. The funds usually have a seven- to ten-year life span consisting of a two- to three-year investment period where properties are acquired, then a holding period where active management is carried out and the properties are eventually sold. These funds typically have a great deal of flexibility in the types of investments they make. For instance, private real estate funds may include private direct real estate investments in multiple property types such as multifamily housing, commercial, retail or industrial properties, plus debt instruments or derivatives.

The purpose of these last few blogs has been to introduce the concept of alternative investment strategies as a way to diversify a portfolio. These are just a few of the many investment types that we research on an ongoing basis so that we’re able to offer the best possible investment advice to our clients.

Please call or email me if you would like more ideas on how we can help you reduce the overall volatility of your portfolio.

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