How to diversify your portfolio to protect yourself from market risks? (13/20)

Alternative strategies

There is still one asset class that H. Browne has not addressed, that of hedge funds. These use many strategies to try to generate absolute returns. The oldest, the majority and the best known of their approaches is to take a short and/or long position on certain securities. Hedge funds are known for being decorrelated from the market and offering positive performance at all times, at least in principle… We also remember that sometimes they make you lose everything (isn't that right Mr. Madoff…).

Hedge funds are generally reserved for institutional clients or large fortunes. That being said, anyone can tame some of their tools, in particular short selling and leverage, to varying degrees of success. I also offered a strategy on this site aimed at playing in the direction or against the market, before I had to interrupt my paid services because of my data provider. Personally, I continue to use this type of strategy nonetheless. If you are not an institutional investor, if you do not have a large fortune and if you are not comfortable with short selling or other alternative techniques, you can always fall back on the ALFA ETF, but the performance is not extraordinary. More generally, let us note that these approaches are not without risks and that it is better to know what you are exposing yourself to when you get involved.

Alternative strategies aim to achieve absolute profitability, regardless of the performance of other assets. The relationship between gold, real estate, cash, bonds and stocks is useful and necessary because it allows us to assess those that have appreciated or those that have depreciated and therefore to arbitrate between them. Alternative strategies, such as the long/short approach, must be managed independently of the typical asset allocation portfolio. An amount must be allocated to it and "played" with it without taking into account other assets.