What Are Alternative Mutual Funds?
Alternative mutual funds are a type of investment vehicle that pursue strategies other than traditional equity and fixed-income investing. They are sometimes called "absolute return" or "hedge fund-like" mutual funds.
These types of funds typically invest in a wider range of asset classes and use more sophisticated techniques than what is generally employed by traditional mutual funds.
As a result, alternative mutual funds can offer the potential for higher returns and lower volatility than traditional investments.
Characteristics of Alternative Mutual Funds
Alternative mutual funds typically have the following characteristics:
- Pursue strategies other than traditional equity and fixed-income investing
- Invest in a wider range of asset classes
- Use more sophisticated techniques than what is generally employed by traditional mutual funds
- Offer the potential for higher returns and lower volatility than traditional investments
How to Select an Alternative Mutual Fund
When considering an alternative mutual fund, it is important to consider the following factors:
Fund Objective and Strategy
Make sure you understand the fund's investment objective and strategy. This will help you determine if the fund is a good fit for your investment goals.
Risk and Volatility
All investments come with some degree of risk and volatility. Before investing, be sure to understand the risks involved with an alternative mutual fund.
Expenses
All mutual funds come with associated expenses. Be sure to compare the expense ratios of different funds before investing.
Performance
Past performance is not necessarily indicative of future results, but it can give you an idea of how a fund has performed in the past.
What Risks Are Associated With Alternative Mutual Funds?
All investments come with some degree of risk. Alternative mutual funds are no different. Some of the risks associated with these types of funds include:
Performance Risk
Alternative mutual funds can be more volatile than traditional investments. As a result, they may lose money in periods of market decline.
Liquidity Risk
Some alternative mutual funds may have restrictions on redemptions, which could limit your ability to access your money in a time of need.
Manager Risk
The success of an alternative mutual fund depends heavily on the fund manager's skill. The fund will likely underperform if the manager cannot generate strong returns.
How Can Alternative Investments Be Useful to Investors?
Alternative investments can be useful to investors for several reasons. First, they can help diversify a portfolio and reduce overall risk. Second, they have the potential to generate higher returns than traditional investments.
Alternative mutual funds can be a useful addition to any investment portfolio. However, it is important to understand the risks involved before investing.
Be sure to consult with a financial advisor to ensure that an alternative mutual fund is right for you.
Alternative Mutual Funds vs Hedge Funds
Alternative mutual funds and hedge funds are similar in many ways. Both types of investments pursue strategies that differ from traditional equity and fixed-income investing.
Alternative mutual and hedge funds can also be more volatile than traditional investments.
However, there are some key differences between these two types of investment vehicles. For one, hedge funds are only available to accredited investors, while alternative mutual funds are available to all investors.
Another key difference is that hedge funds are not subject to the same regulations as alternative mutual funds. This means that hedge funds can employ more aggressive strategies and take on more risk.
For these reasons, hedge funds are often considered riskier than alternative mutual funds.
Tips Before You Invest
Before investing in any mutual fund, be sure to research the fund's investment objective, strategy, and risks.
It is also important to compare the expense ratios of different funds before investing.
Finally, remember that past performance is not necessarily indicative of future results.
When considering an alternative mutual fund, consult a financial advisor to ensure it is appropriate for your investment goals.
The Bottom Line
Alternative mutual funds are a type of investment that seeks to generate returns that differ from traditional equity and fixed-income investments.
These funds can be riskier than traditional investments. However, they may also provide the potential for higher returns.
Before investing in an alternative mutual fund, be sure to research the fund's investment objective, strategy, and risks.
It can be a useful addition to any investment portfolio, but it is important to understand the risks involved before investing.
FAQs
1. What is an alternative mutual fund?
An alternative mutual fund is a type of investment that seeks to generate returns that differ from traditional equity and fixed-income investments. These funds can be riskier than traditional investments. However, they may also provide the potential for higher returns.
2. What are some of the risks associated with alternative mutual funds?
Some risks associated with alternative mutual funds include liquidity risk, manager risk, and potential loss.
3. How can alternative investments be useful to investors?
Alternative investments can be useful to investors for several reasons. They can help diversify a portfolio and reduce overall risk. Additionally, they have the potential to generate higher returns than traditional investments.
4. What is the difference between an alternative mutual fund and a hedge fund?
The key difference between an alternative mutual fund and a hedge fund is that hedge funds are only available to accredited investors. In contrast, alternative mutual funds are available to all investors. Hedge funds can also employ more aggressive strategies and take on more risk.
5. What should be remembered before investing in an alternative mutual fund?
Some tips to remember before investing in an alternative mutual fund include researching the fund's investment objective, strategy, and risks. Additionally, it is important to compare the expense ratios of different funds before investing. Finally, remember that past performance is not necessarily indicative of future results.
