If You Invest, You Should Be In Alternative Investments

Hedge Funds, Managed Future Funds, Currencies, Commodities...

For 90% of investors these are foreign, even scary terms. I mean, hedge funds are what caused the 2008-2009 crash, right?

Let me give some clarity around an investment world that gets a bad rap... There are a thousand different types of hedge funds, managed future funds and even currency and commodity funds. They all target different investments and different strategic asset allocations and different methods of investing your dollars. But this is absolutely no reason to avoid them altogether.

You can buy an investment that makes money when the stock market goes down.. You could:

Short (sell) a stock

Buy an ETF that increases when the market goes down

Buy an option would protect your downside risk and allows you more leverage

With even more leverage and you can sell a future that follows either the DOW or the S&P 500

Invest in a hedge fund that trades futures and can buy or sell the futures

Invest in a managed futures fund that also will trade on the up and down side of the market.

For example, some managed futures funds are up over 40% year to date, while the stock market is down over 10% and they only follow the DOW or the S&P 500. (source: Barclay Hedge).

With so many choices and ways to manage your downside risk in the stock market, I can understand the fear factor. There were hedge funds that over-leveraged in mortgage backed securities and then bet against what they were selling and THEY did help bring the markets down.

However, weeding out the ones that won't fit with your risk tolerance or more importantly your comfort level is quite simple. Your financial advisor should be able to make recommendations that fit well within your overall portfolio.

My advice, understand what you are investing in. If you understand stocks, get a manager that can short (sell) stocks. Don't invest in what you don't understand.. If you have over $1 million you can pick your managers wisely with your financial advisor. If you have less than $1 million in investable assets, don't shy away from those investments that can actually reduce your overall risk. Invest in good, diversified mutual funds that include different types of investment that spread the money across my recommendations.

Let's look at some year to date returns to prove my point (as of 8/22/11):

Large Cap US Stocks: -9.10%

International Large Cap Stocks: -13.85%

Emerging Market Stocks: -16.18%

Precious Metals: +33.77 %

Agricultural Commodities: +2.20%

Long Term Government Bonds: +15.10%

Residential REITs: +2.16%

Barclay Hedge Fund Index: +1%

Morningstar Long/Short Commodities Fund: +5.02%

You will notice 1 trend... Every "traditional" investment outside of US bonds, i.e. stock diversification, is down. Almost EVERY Investment outside of stocks is up. The average American has the majority of their portfolios in stocks.. This is way tactical asset allocation is so important..

Diversify well, diversify wisely and diversify out of your comfort zone in alternative investments to increase your overall return and decrease your overall risk.

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