Alternative Investments – Financial Alternatives

It is now a widely held belief that investing in stocks and other financial instruments in the traditional manner generates an investment return that is driven more by the latest piece of political rhetoric, or the most recent announcement of sovereign debt risk or unemployment figures from some far flung corner of the world, than by underlying company fundamentals like good management and a strong balance sheet. Aside from this inherent volatility, many investors also feel over-exposed to financial markets, especially those coming close to retirement that may have little time left to regain catastrophic losses in any one holding.

This shift in mind-set amongst investors has driven a huge growth in alternative investment management, with most financial institutions now offering investments that are organised and managed in such a way as to attempt to avoid volatility, or generate a return when markets fall, or some other such strategy.

Short Only
Short only funds bet on particular stocks losing value. Investors might buy into a short only fund if they felt particularly bearish (pessimistic) about the short term future of financial markets in general, and some may allocate capital to this strategy as a hedge against the impact of a general downturn.

Ultra-Short Bond Funds
This a type of investment fund that invests fixed-income bonds with very short-term maturities. Such a fund will usually invest in bonds with maturities of around 12 months. This strategy is designed to generate higher yields than traditional bond investing with less volatility.

Market Neutral
Market neutral is an alternative investment strategy designed to profit from growth and depreciation in the value of stocks. Whilst there is no finite technical definition for market neutral investing, for the most part, the overall strategy will involve taking long and short position in a stock (betting both for and against it) in order to maximise the return from making good stock selections and minimise the impact from broad market movements.

Absolute Return
The original name for hedge funds – absolute return investing involves a wide variety of alternative investment management techniques designed to capture financial gains during any and all market conditions. Absolute returns refer specifically to the return of the fund or investment over a given period of time i.e. the actual growth or depreciation. This differs from relative returns, which is a measure of investment returns when compared to similar investments or a sector.

Long / Short
A true mixed bag of investing, long short strategies involve taking long positions in one stock and betting against the value of another stock. In theory, as one sector or company makes a gain, there will be losses in competing sectors, and investment manager aim to identify such opportunities and capitalise on them. A broad example might be an investment manager who thinks oil prices will rise significantly based on some impending political or social crisis, so they might buy into oil company stocks and short stock of companies that rely heavily on oil as a key input in their business.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.