“Investors worried that the stock market is stuck in a trading range might want to consider alternative and absolute return funds designed to profit in both up and down markets, but the most compelling offering fails on several counts. Last week I wrote about managed commodity funds as a way to play commodities in all markets. The commodity funds go long and short various futures contracts based on the trend in the market. Other funds employ a similar strategy with respect to other asset classes, but a fund with a unique strategy is iShares Diversified Alternatives (NYSE:ALT),” Don Dion Reports From The Street.
Dion goes on to say, “ALT searches for relative values in the financial markets that can be broken down into three main categories: yield and futures curve arbitrage, technical momentum/reversal and fundamental relative value. The first strategy involves going long and short at the same time in a similar contract to profit from a mispricing. The second strategy looks for assets that are outperforming or underperforming historical performance. The third strategy seeks to buy markets that are undervalued and short markets that are overvalued.”
“ALT uses traditional hedge fund strategies used to profit from relative, rather than absolute, prices. For example, if you believe Germany’s stock market is relatively expensive compared to France’s stock market, then you can profit from a closing of the valuation gap. If you short Germany and buy France, it doesn’t matter if the stock markets go up or down, what matters is the France outperforms Germany. Of course, if the gap persists or widens, you stand to lose money on the trade. Overall, this is a lower volatility strategy, since by going long and short similar securities much of the market risk is removed. Nevertheless, it is very important to remember events such as Long Term Capital Management in the late 1990s, which imploded when markets behaved differently than their models predicted,” Dion Reports.
Here are some more details we have put together on the iShares Diversified Alternatives ETF (NYSE:ALT) below:
iShares Diversified Alternatives ETF (NYSE:ALT)
The objective of the Trust is to maximize absolute returns from investments with historically low correlation to traditional asset classes while seeking to control the risks and volatility inherent in futures and forward contracts by taking long and short positions in historically correlated assets. The return on assets in the Trust is not intended to track the performance of any index or other benchmark.