- Alternative assets are named as such because they do not change in price in the same way that normal assets do. Many stocks and bonds move in tandem: when the general market is up, most investors are up, and when it is down, most investors are down. Alternative assets tend to move in a more stable way, and in some cases have an inverse correlation. For example, some hedge funds bet on market downturns, causing them to rise when the market falls.
- Many college endowments and other large managers invest in these assets. Some investors prefer assets that do not correlate with the rest of the market, so that they can have steadier investment returns. A college would prefer not to cut its budget one year because the market dropped, but if all of its assets are in the market, this could become a necessity. Other investors use alternative assets to ensure that they have money when traditional assets are cheap, so they can shift money into standard investments at an opportune time.
- Many hedge funds pursue investment strategies that deliberately avoid correlations with traditional asset classes. Some do so by aggressively "hedging" their bets. In other words, they bet that some stocks will go up while others will go down, so broader market fluctuations do not affect them. Others use rapid-fire trading strategies to ensure that their portfolio is constantly changing, so they are not over-invested in any particular sector or asset class. Others invest in more obscure assets, or in derivatives.
- Some hedge funds behave much like traditional investments. A long-only stock fund, for example, will tend to correlate with the broader stock market, even if it is managed in an unusual way. Other hedge funds take the same risks as major companies, and correlate in that way. For example, a hedge fund that traded mortgage-backed securities might have lost money in 2008 because these securities dropped in price; the drop in price precipitated a broader decline in market prices.
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