Invest in traditional assets in a unique way (portfolio allocation, sector specification, etc.).
One of the best examples of this is the equity long-short strategy. In essence, they go long on stocks set to rise in value and short on stocks set to decrease in value. The goal of this strategy is to mitigate your risk, as you minimize your stock market exposure. The benefit, as well, is that as long as one strategy is “more right” than another (i.e. the longs gain more than the shorts lose, or vice versa), you come out on top. This means that, even in a severe market downturn, it’s possible to make money.
Other hedge funds get very creative with their tactics. Strategies range from purchasing water rights to buying catastrophe bonds to investing in single malt scotch. Some even more unique policies involving longing/shorting commodities based on how many ships enter and leave ports globally or longing/shorting the economy based on how full parking lots are outside malls.
Why should you invest?
Put simply, they seek better-than-market returns.
How much better? By the close of 2019, the 20 highest-performing managers collectively reaped in $59.3 billion just over the course of 2019. Leading the pack was $8.4 billion from TCI’s manager Christopher Hohn, followed by $7.3 billion from Lone Pine’s Steve Mandel.
The majority don’t make it past year 5, and about one in three fail every year.