Alternative Strategies
These days, investors have a variety of ways to implement alts
strategies in a portfolio. Here's a brief explanation of some
alternative strategies.
Long/Short
Strategy
This strategy entails buying some stocks in anticipation of
their value increasing, known as having a long position, and also
entering into short positions in stocks, in anticipation that their
value may decrease. Holding these competing positions (in theory)
should level out returns and reduce overall risk. Shorting allows
an investor to sell a stock that he or she does not own. Investors
enter into short positions to either speculate (profit from an
overpriced stock or market) or in an attempt to protect a long
position in a stock. Investors who are long lose money if the stock
they expected to go up actually goes down. If the investor holds a
short position and the stock actually increases in value, the
investor must then buy the stock at the higher price. An investor
who is short the market profits when the stock or market decreases
in value. Theoretically, if the value of a stock that an investor
is shorting continues to go up, the investor is exposed to the risk
of unlimited loss.
Momentum
Strategy
This strategy involves purchasing stocks that are on an upward
trend or are expected to have high returns and selling stocks that
are on a downward trend. Momentum investors are typically looking
for stocks to show significant gains in a matter of months. The
risk is that the stock may not move in the direction expected.
Leverage
Strategy
This strategy is the use of borrowed money (i.e., debt) to
increase returns by investing the borrowed funds with the intent to
earn a greater rate of return than the cost of interest on the
borrowed funds. While leverage can help increase returns, it is
possible an investment will move in the opposite direction
expected, making the loss much greater than it would have been
without using debt. Leverage therefore can magnify both gains and
losses in this way.
Managed
Futures Strategy
A futures contract is a contract that obligates the holder to
buy or sell an asset at a specific time, known as the delivery date
(or final settlement date) and price, known as the futures price.
There are two parties-one with the obligation to buy at a certain
price, and the other with the obligation to sell-and they must
exercise their contract on the delivery date. Managed futures may
involve going long or short in futures contracts in areas such as
commodities and financials, including interest rates and
currencies.
Absolute Return
(also known as Hedge Strategies)
The styles and techniques often called hedge strategies or
absolute return strategies seek to achieve positive or "absolute"
returns in all types of markets versus matching or beating an index
(returns tied to an index are known as "relative" returns). With
hedge strategies, the goal is to make money in all types of
markets, regardless of the direction of the market.
 
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