Navigating liquid alternative investment strategies

Long-short equity portfolios hold both long and short positions in equities, ETFs, and related derivatives. This means fund managers take long positions in securities and derivatives they expect to appreciate and short positions in securities and derivatives they expect to decline. They may also adjust their overall market exposure to take advantage of bull or bear markets.

Derivative income strategies incorporate options, typically through covered call writing, to generate income.

Equity market neutral funds look to profit from long and short equity strategies, but they aim to take little to no market risk by offsetting long positions with matching short ones.

Event driven funds attempt to profit when security prices change in response to certain corporate actions, such as mergers and acquisitions, restructuring, and bankruptcy, for example.

Multi-strategy portfolios employ a mix of investment strategies, at least two of which are alternative strategies that comprise 30%+ of the portfolio (although most expose a majority of funds to alternative strategies). Some funds may adjust their exposure to different strategies and asset classes.

Options trading strategies attempt to limit downside risk and market sensitivity. These funds use a variety of options trades, including put writing, options spreads, options-based hedged equity, and collar strategies, among others.

Relative value arbitrage funds attempt to take advantage of price discrepancies between pairs or combinations of securities, wagering that the difference will narrow or close.

Macro trading strategies look to capitalize on macroeconomic and political trends by taking long or short positions in equities, bonds, currencies, and commodities in various countries. For example, these funds may short stocks in countries they believe are headed into recession soon.

Systematic trend funds primarily implement trend-following, price-momentum strategies by trading long and short futures, options, swaps, and foreign exchange contracts. They typically diversify across a range of global markets, including commodities, currencies, government bonds, interest rates, and equity indexes.  

While not exactly a strategy, commodity-focused funds can fall under the alternatives umbrella since they provide exposure to assets that don’t necessarily move in lockstep with stocks and bonds.

Broad-basket commodities funds invest in a diversified basket of commodities such as grains, minerals, metals, livestock, cotton, oils, sugar, coffee, and cocoa. They may invest directly in physical assets or commodity-linked derivatives.

Focused commodities funds instead target specific commodities sectors such as agriculture, energy, industrial metals, and precious metals.

Similarly, digital asset funds provide exposure to assets that utilize blockchain technology. These portfolios primarily invest in decentralized finance (DeFi) assets, stable coins, currency assets, smart contracts platforms, exchange assets, privacy assets, yield farming, and nonfungible tokens (NFTs).

Digital assets are often characterized by two risk factors: momentum and volatility, and funds can gain access to them through physical or derivative exposures and incorporate long-only investments as well as other hedging techniques.