Leveraged investments offer great potential for profit or - as many homeowners have found out the hard way in recent years - risk of loss. A common type of leveraged investment, although usually not thought of as such, is a home purchased with little money down, but a big mortgage. LeverageĪn investment made with borrowed funds is said to be leveraged. Often set up as limited partnerships, hedge funds may use exotic investment strategies, and are much more loosely regulated than mutual funds, although recent government proposals would tighten oversight. Today, it is most often used to describe any number of funds that cater only to accredited investors. Years ago, it referred to a fund engineered to protect against market downfalls. The term inflation-hedge refers to any asset or type of asset, such as commodities, expected to appreciate in value in a climate of rising prices. Hedging reduces risk, but it also tends to mute returns. A common hedging strategy is to use short positions (selling stock shares you don’t own, but borrow) to offset any potential loss you may suffer by holding a long (buy and hold) position. If you expect that your Asset A may zig, and you purchase Asset B in the hope that it will simultaneously zag, you’ve just hedged your position. It is often expressed as a percentage, so that a fund that reaches a high of $100 a share and then slides to $50 a share (regardless of whether that happened in a decade or a day) would have a maximum drawdown of 50 percent. Drawdown (or Maximum Drawdown)Īn historic measurement of the worst you could have possibly done in a particular investment - had you bought at the absolute top and rode it all the way down to the absolute bottom.
(They have a “correlation of -1.”) Alternative investments strive for low to negative correlation to the broad markets. (They have a “correlation of 0.”) And two investments that move in opposite directions, at the same time and to the same degree, are said to have perfect negative correlation. (More technically, they have a “correlation of 1.”) Two investments that move with no relation to each other are said to be uncorrelated. If two investments move up and down at the same time, and to the same degree, those investments are said to be perfectly correlated. On the other hand, if investor demand lags, the shares of a closed-end fund could sell for a hefty discount. Because of the fixed supply of shares, eager investors who want to buy into the fund may wind up paying a significant premium over the market value of the pooled securities. Like a mutual fund or an exchange-traded fund (ETF), a closed-end fund pools securities, but it differs from its open-ended cousins in that it rarely creates or redeems new shares. Many alternative investments advertise that they protect investors against such events. Black SwanĪ term popularized by mathematician Nassim Taleb, it refers to a rare and extreme event that has the potential to throw financial markets into turmoil. Therefore hedge funds and private equity firms will often restrict their customer base to so-called accredited investors - those who earn at least $200,000 per year ($300,000 for a couple), or boast $1 million in net worth. Securities and Exchange Commission does not regulate funds that cater solely to the wealthy. On the assumption that those with money must have some financial savvy, the U.S.
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