r/valueinvesting
I wrote up 5 alternative investment strategies that can diversify a portfolio
Explores 5 alternative strategies (trend following, carry, merger arb, cat bonds, macro RV) to diversify portfolios via unique risks.
I wrote up a continuation of the diversification post I shared last week, since many people seemed to like that one.
The previous idea was basically: diversification is not about owning more stocks. It is about owning different risks.
This one is a bit more practical.
I looked at 5 alternative strategies that can behave differently from normal stock picking:
- Trend following
- Carry
- Merger arbitrage
- Cat bonds
- Macro relative value
The point is not that these are automatically good investments. Some are hard to access, expensive, leveraged, or whatever.
But I think they are useful to study because each one is paid for something different and is “fundamentally different” in many ways.
- Trend following is paid when trends persist.
- Carry is paid for holding risk nobody wants.
- Merger arbitrage is paid for deal completion risk.
- Cat bonds are paid for insurance catastrophe risk.
- Macro relative value is paid when relationships between assets normalize.
I think it is quite interesting to see something fresh and different from the usual “buy & hold” strategy or the typical stock/bond portfolio.
wrote it up here if anyone’s interested:
https://www.jeravalue.com/en/blog/return-engines
i’m also curious to see how people here think about these strategies, and what good ones I might be missing.
This is a thoughtful way to look at diversification. Looking at diversification through the lens of return drivers rather than asset counts is a useful way to think about portfolio construction. The common thread across the strategies listed is that each is compensated for bearing a different type of risk, whether that is trend persistence, deal risk, catastrophe risk, or market dislocations. A few other areas that may fit this framework are volatility risk premia, liquidity provision, and alternative risk premia such as value, momentum, or quality. What makes these strategies interesting is not necessarily their standalone return potential, but the fact that their performance can be driven by factors that differ from traditional equity and bond exposures.
Ultimately, the key question is not how many assets are owned, but whether the underlying sources of return are truly distinct. Two portfolios can look diversified on the surface while still being exposed to many of the same economic risks. Focusing on the risks being assumed and the sources of expected return can often provide a more meaningful perspective on diversification.