The Alternative Approach
Alternatives are investments that don't fall into traditional investment categories—namely long-only stocks, bonds, or cash. Alternative investment managers can invest long or short, across multiple asset classes, aren’t constrained to an investment style, and aren't entirely dependent on the markets going up to achieve positive absolute results.
Alternative investments, which have been used by large institutions and endowments for quite some time, have become more mainstream in recent years. Not only are they more popular among individual investors, but there are also more alternative vehicles available, making investing in alternatives possible for a much broader universe of investors.
A Different Kind of Risk-Return
Given their non-traditional approach and their ability to invest in areas and ways traditional investments cannot, alternative investments have the potential to improve the overall risk-return characteristics of a portfolio. As such, a modest allocation to alternatives may be prudent for more investors than previously was the case.
Nobel Prize winning Economist Harry Markowitz, renowned for his research on Modern Portfolio Theory created the theory of the Markowitz Efficient Frontier. As illustrated here, the addition of alternatives moves this curve up and to the left - expected risk decreases while expected returns increase.
A Different Philosophy
Simply put - the best way to grow capital is to protect against significant losses.
Alternative investment portfolios should have diversification across asset classes and investment strategies. They should utilize a different approach to investing than do traditional equity or fixed income investments. This approach may involve holding both long and short positions, using hedging strategies, and investing in illiquid investment vehicles. Investors using alternatives may also have a goal of achieving an absolute return as opposed to relative performance versus an index.
A Different Set of Strategies
It is easy to discuss investing in alternative strategies, but what does this mean from an asset class and diversification standpoint? A wide variety of strategies may be used, including market neutral vehicles, arbitrage, distressed debt, long‐short fixed income, global macro, currency and relative value.
Get more details on historical performance, holdings and allocations of our Value Line Defensive Strategies Fund - available in both Investor and Institutional classes.