Investing in Alternative Investments

An alternative investment literally means any investment that is an alternative to traditional assets like shares or bonds. Hedge funds, private equity funds, venture capital funds, commodity funds etc are some of the many investments that fall into this category.

Often real estate too is considered within the scope of 'alternatives'. While 'real estate' and commodities may be considered to be distinct asset classes in themselves, not all alternative investments should be necessarily treated so - in fact they are better viewed as investment strategies that are applied to traditional asset classes like shares and bonds.

Most alternative investments are designed to generate relatively higher returns by applying sophisticated trading strategies across a diversity of asset classes like shares and bonds, while limiting risks.

For example, a market-neutral long/short equity fund (a type of hedge fund), could be designed to profit from both rising as well as falling equity markets. Simplistically, this is achieved by buying shares that are expected to go up, while selling short (meaning entering a contract to sell shares that you don't own today) those shares that are expected to fall. As long as the split between the longs and shorts are well researched and implemented the effective returns for the strategy will be largely market neutral.

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