Diversifying with Alternative Investments

July 18, 2011 James Heinsman Hedge Fund News

If you are looking for a good way to diversify, check out the various alternative investments available such as: hedge funds, real assets, Exchange Traded Funds (ETFs) and more.  The question becomes though, are these options providing real diversification?  And what does that mean?

Understanding Diversification

According to a Daily World article, with real diversification, investors can “benefit from adding risk exposure that is not available through more traditional securities.”  So take hedge funds for example which are private investments not bought and sold through public markets.  These are similar to mutual funds, but “designed to conform to specific legal requirements to avoid heavy government regulations. Investors should be aware that many hedge funds do not truly diversify their portfolio because the underlying investment strategies use traditional investments.”  Hedge funds utilize short positions in other securities which makes them more volatile than traditional securities.

Benefits of ETFs

ETFs in general have good investment possibilities that do not generate crazy expenses. But that’s the general rule.  There are some exceptions.  There are some ETFs for example that come with management fees as well as other costly fees which may result in an erosion of return rates from underlying specific asset classes.  Hedge funds can incur high fees such as 2 percent of assets per year as well as 20 percent of the profits.  Mutual funds on the other hand will only make a charge of less than 0.5 percent annually with 0 percent profits.  So when you come across a successful hedge fund manager it is worth hiring them as they can usually accrue significant profits for you.

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