Clearly, there are many reasons why investors should consider alternatives as core component of a diversified investment portfolio. Alternatives provide investors with investment vehicles that strive to take advantage of varied investment opportunities. The "hedged" nature of many alternatives may protect investors during periodic declines in the traditional capital markets. Investing in alternatives may also provide investors an opportunity to invest in pure arbitrage strategies (convertible, merger, fixed income) that are largely independent of market direction. Similarly, alternatives are able to take advantage of structural investment anomalies that exist in many segments of the capital markets.
Importantly, though, investors must understand the wide range of risks associated with alternatives. In addition to the risks inherent to stocks and bonds, alternative investing does have specific risks. Alternatives often charge fees that are substantially higher than mutual funds and, unlike mutual funds, are not subject to such stringent regulatory requirements and are not required to provide periodic pricing or valuation information to investors. Investors must understand that they are investing in a strategy and not an asset class, which means that performance of the fund is dependent upon the manager's ability to execute the strategy and his/her constancy in implementing that stated investment strategy. Positions may be leveraged and some instruments used can be highly illiquid and/or speculative, thus increasing the risk of investment loss. Additionally, shorting market instruments can expose managers to potentially unlimited losses. Moreover, alternatives tend to be inefficient investment vehicles for tax purposes and may involve complex tax structures that, in turn, may cause delays in distributing important tax information.
Coronado Investments, LLC, a member of FINRA and SIPC.