Focus Sections » OTHER FOCUS SECTIONS » ALTERNATIVE INVESTMENTS

Traditional investments have made room for alternative products, but hedge fund methodology can be traced back to 17th century rice farming in Japan.

— ‘Hedge funds have grown in popularity largely because investors have wised up to their benefits and have become increasingly convinced of their robustness’ Francois Hullo, BNP Paribas Asset Management

Hedge funds have come a long way due to the development of a broad range of investment choices.

Hedge funds have firmly established themselves as a mature asset class over the last few years and are increasingly being used to provide diversification in the portfolios of high net worth individuals. Today, the worldwide market in hedge funds stands at more than $500bn (E442bn), there are more than 7000 active hedge funds, and the industry is growing at 20 per cent a year —considerably faster than the market for traditional mutual funds.

— ‘Currency returns tend not to be correlated with the returns of other asset classes such as equities. This means the effect of adding active currency on the total risk of the client’s overall strategy will typically be low’ Mark Fitzgerald, Barclays Global Investors

Whether because it is a useful investment strategy in its own right or because it is so effective in balancing an equity-dominated portfolio, currency management opens up options for the investor.

The broad decline in equity markets during the past few years has led many investors to diversify their portfolios, with some looking at the opportunities available in alternative investments. Although equity market neutral funds have become one of the most popular investor strategies, there is also a wide array of other types of alternative investments to choose from. One such area that certainly deserves consideration is currency management.

The question of which non-traditional investment to select from a line-up can be easier to answer once advantages and disadvantages have been compared.

— ‘While past performance is not necessarily indicative of future results, and hedge funds have at times been at the centre of market turmoil, an allocation to alternative investments can improve a portfolio’s ability to preserve capital and increase wealth’ Gian Luigi Pedemonte, TradingLab

Of the advantages that hedge funds bring to a portfolio, diversification and risk control are the most valuable. A scientific approach to risk diversification maximises that value.

Alternative investments are distinguished from traditional investments by their regulatory structure. They are normally non-regulated. This endows them with flexibility in investment strategies as well as lower levels of disclosure and high minimum investment requirements. Generally, the minimum investment is around E25,000.

— ‘Products in traditional markets are unable, on their own, to fully meet new demands’ Gerhard Koch, DWS Investments

Investors who put their faith in volatility need the backing of professionally constructed strategies.

With the longer-term yield prospects for traditional forms of investment such as cash, bonds and equities somewhat dented, innovative investment strategies are increasingly moving centre stage. There is now growing demand for alternative product concepts that are largely uncorrelated, offer low price volatility and aim to achieve fairly calculable “absolute” returns. Well-crafted mutual funds, launched in a timely fashion, can exploit gyrations on the stock markets and movements in the international foreign-exchange markets.