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.
