The terms “alternative investment” and “hedge fund” often get used interchangeably as hedge funds are an important and growing part of the alternative investment arena, which also includes private equity and debt, venture capital and real estate. Do not confuse hedge funds with Managed Futures. Managed futures clients have their funds held in segregated accounts at an FCM.
Alternative investment managers may take advantage of pricing anomalies between related financial instruments, engage in “momentum” investing to capture market trends, or utilize their expert knowledge of markets and industries to capture profit opportunities that arise from special situations. The ability to use derivatives, arbitrage techniques and, importantly, short selling – selling assets that one does not own in the expectation of buying them back at a lower price – affords alternative investment managers rich possibilities to generate growth in falling, rising and unstable markets.