Alternative Investments: Fundamentals

So, there are two key principles that lie behind alternative investments.

The first is that they should seek to generate returns irrespective of market direction. This process is often called hedging (as in 'hedging your bets') because you are seeking to protect your portfolio against losses.

The second characteristic of alternative investments is that the manager must be able to exercise significant skill and judgement to select long and short stock positions that will cancel out market risk and generate a healthy return.

These two guiding principles also sum up the reasons why investors choose to put money into alternative investment strategies.

Firstly, the investor wants to ensure that some portion of his portfolio is hedged, to protect against downside risk.

Secondly, investors are attracted by the skill of the investment managers and the potential for high returns.