Top hedge fund strategies to diversify your portfolio

June 3, 20224 min read
Top hedge fund strategies to diversify your portfolio
Share on facebookShare on TwitterShare on Linkedin

Key takeaways

  • Hedge funds are alternative investment funds. Their aim is to reduce risk and potentially offer outsized returns through different types of investment strategies
  • Recent data showed that hedge funds outperformed both the NASDAQ and the S&P 500 by 12.54% and 8.08%, respectively. 
  • The type of strategy employed depends on different factors, like the investors’ asset group focus, their risk tolerance or the scale of their operations. 

Though a poster child for exclusivity, hedge funds are no strangers to the limelight.  Rarely a week goes by when they’re not in headlines for their stance on specific asset groups, commodities, or even entire industries.

As an alternative to the traditional stocks and bonds market, hedge funds offer a different way to invest. Investors looking to diversify their portfolios with hedge funds usually begin by evaluating the fund’s operational strategy, which differ on a variety of parameters, like scale, risk tolerance and asset group focus. 

The Bullish Hedge

Hedge funds aim to reduce risk on an investment. They do this through hedging, or the act of buying/ selling an asset to help reduce the risk of losses in another asset. 

Though hedge funds perform this in very sophisticated ways, the concept of hedging can be compared to the ways people mitigate risk in their everyday lives. By paying for insurance for example, we hedge against the potential loss, be it financial or physical, in the event of an unprecedented event.

Hedge funds – which are funded with subscriptions from qualified purchasers or institutional asset allocators – aim to achieve outsized returns by employing advanced strategies to compensate for potential loss. Though no two hedge funds are exactly the same, they share some common characteristics, such as lower liquidity (they’re hard to pull out of), less regulation due to higher subscription minimums and higher risk-return profile. 

Backed by strong performance over the last few years, the market’s been bullish on hedge funds.

The most recent data from Institutional Asset Manager showed that hedge funds outperformed both the NASDAQ and the S&P 500 for the month of May, by 12.54% and 8.08%, respectively. 

The five top hedge fund strategies

Hedge fund strategies are in essence a give and take, with the crucial, added element of “for how long?” The goal of the funds is to balance the wins against the losses, and to time the market correctly to earn returns in excess of their benchmark.  

One of the most common strategies employed by hedge funds is the long/short equity strategy, which aims to minimize market risk by taking both long and short positions on stocks. In theory, this means that if the market declines and the longs take losses, the shorts can potentially provide gains and keep the portfolio profitable.

In contrast, market-neutral hedge funds assign shorts and longs equal market value.  The entire return of the fund is driven by the quality of the stocks selected by the manager, irrespective of the movement of the market.This strategy is lower risk but expected returns are lower, too. 

Arbitrage strategies involve exploiting differences in price (pricing inefficiency) across different markets for identical assets. For example, if stock of company X can be found on the New York Stock Exchange (NYSE) for $10 but is trading for $10.05 on the London Stock Exchange (LSE), the arbiteur (trader) in the case can earn a profit of 5 cents per share. 

Similar, event-driven hedge funds also bank on momentary fluctuations, but are more associated with special situations. Pricing inefficiencies that occur right after a major corporate event like a bankruptcy, a merger (merger arbitrage), a spinoff  or even an earnings call mean that these funds can buy the security or equity at a lower price, in hopes of reselling it in the future at a higher price, or its assumed true value.  

Global macro hedge funds are also event-driven but on a larger scale. Managers of these funds attempt to profit from broad market swings caused by political or economic events. These types of hedge funds were particularly active before the Brexit vote in 2016 when the United Kingdom voted to exit the European Union (EU). Hedge funds that were confident that Britain would vote to leave the EU took long positions in safe assets like gold, and shorted against European stocks and the British pound. 

Other types of hedge funds include credit hedge funds (primarily invested in debt), quantitative and FX. While multi strategy hedge funds exist, due to the high level of risk and operational effort required to maintain these types of funds, single strategy funds are far more common.

Yieldstreet and Hedge Funds

One of the biggest drawbacks to hedge funds is that they’ve historically been limited to institutional investors and qualified purchasers. Yieldstreet does not yet offer access to hedge funds, but is a leading platform in the alternatives space as it allows investors to allocate to a large variety of private market assets, including real estate, private equity, private credit and digital currencies.  

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure