Alternative mutuals funds are good way to gain access to traditional investment securities. But before you invest, make sure to you do your research to see if these investment types are appropriate for them. Continue reading below to learn more about what alternative funds can do for you!

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Table of Contents

What is an Alternative Fund?

Alternative Funds refer to mutual funds, hedge funds, or Exchange-Traded Funds (ETFs). They are invested non-conventional investment security, they can be also categorized as securities other than stocks, bonds, and cash.

You can invest alternative funds in the following:

Real estate
Loans
Commodities
Unlisted securities (like art or jewelry)

Alternative Funds Investment Strategies

Alternative funds are used for portfolio diversification strategies since alternative investments have a low correlation to that of the broad market, like S&P 500 Index. Some alternative funds have investment strategies, that invest in one area like commodities/ While other alternative funds may invest in a range of alternative investments.

Securities like derivatives, currencies, or distressed bonds are sometime what alternative funds invest in since they are a little bit easier to understand.

Before Investing in Alternative Funds

Before you invest in alternative funds make sure you take these things in consideration:

Investor should always be aware that price fluctuations are sometimes greater than traditional securities, like stocks and bonds, since they’re usually invested in non-traditional securities.
Alternative funds tend to have higher expenses than most of mutual funds and ETFs.
Since alternative don’t have a clear legal structure, the contents of their portfolios aren’t always clear to the investor. So you must do you best to known the fund’s objectives and holdings.
It’s important to know who’s managing the fund. You have to make sure that the manger you choose has years of experience and has a track record of performance associated with the fund you are considering.
Just know that past performance has no guarantee of future results, but it can show you what to expect from the fund. So make sure to look for long term returns of at least five years and to avoid funds with shorter histories.
Most alternative funds have minimum initial investments or they may require the investor to have a net worth of at least $1 million before investing.

Bottom Line

Alternative funds are not every investor out there since they typically have a higher market risk as well as high expenses and higher minimum investments than the average mutual fund and ETFs.

So if you’re planning to diversify, you can do so by building a portfolio with funds in different categories, capitalization, and assets. Alternative funds are not needed for diversification, but they may be used properly if the investor does their research before investing.

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