asset class

Forex funds and managed accounts have become popular alternative investments. The term “Alternative Investments” is defined as investment securities trading outside traditional investments like stocks, bonds, cash, or real estate. The alternative investment industry includes:

• Hedge funds.
• Funds of hedge funds.
• Managed futures funds.
• Managed accounts.
• Other non-traditional asset classes.

They differ in the dimensions that matter. Risk varies by investment, not by label. Liquidity varies: some alternatives trade readily, while others are difficult or slow to sell. Valuation varies: assets that do not trade on public markets can be hard to price, and stated values may rest on estimates. Complexity and fees vary as well, and complex or illiquid products can carry risks that are harder to see in advance.

Correlation deserves particular care. Alternatives are often discussed in connection with diversification because some of them have, at times, moved differently from traditional markets. But correlation is a measured, changing property of specific investments over specific periods, not a fixed attribute of a category. An investment’s past correlation with other markets may not persist, and relationships between markets can shift. Neither the alternative label nor a low correlation measured in the past assures diversification or any particular return.

Whether adding any investment actually diversifies a portfolio depends on the positions the portfolio already holds, their concentrations and correlations, and the strategy being pursued, and all investments involve risk, including the possible loss of the amount invested. How any of this applies to a particular portfolio is a judgment each investor must make independently, ideally with a qualified professional. Trading foreign exchange involves substantial risk of loss and is not suitable for every investor.