Alternative investments, in general, use strategies and techniques not available to traditional investment vehicles, like mutual funds, in order to produce and enhance their returns. One of the most significant differences is that alternative investment managers have access to an expanded array of non-traditional investment instruments, tools and techniques. These unique tools can include futures, short-selling, leverage, options, overlays, arbitrage, and private markets. Below is a list of the most common alternative investments strategies.

Merger Arbitrage/Risk Arbitrage
Merger Arbitrage, sometime called Risk Arbitrage, is an event-driven strategy in which the funds typically invest simultaneously long and short in the companies involved in a merger or acquisition. Normally, the stock of an acquisition target appreciates while the acquiring company's stock decreases in value. These strategies generate returns by purchasing stock of the company being acquired, and in some instances, selling short the stock of the acquiring company. Managers may employ the use of equity options as a low-risk alternative to the outright purchase or sale of common stock. Most Merger Arbitrage funds hedge against market risk by purchasing S&P put options or put option spreads.

Fixed Income Arbitrage
Fixed Income Arbitrage is a market neutral strategy designed to capture pricing disparities within fixed income markets and related derivatives, while neutralizing exposure to interest rate risk. Generic types of fixed income hedging trades include: yield-curve arbitrage, corporate versus Treasury yield spreads, municipal bond versus Treasury yield spreads and cash versus futures.

Convertible Arbitrage
Convertible Arbitrage is a strategy which involves purchasing a portfolio of convertible securities, generally convertible bonds, and hedging a portion of the equity risk by selling short the underlying common stock. Certain managers may also seek to hedge interest rate exposure under some circumstances. Positions are designed to generate profits from the fixed income security as well as the short sale of stock, while protecting principal from market moves.

Global Macro
Global Macro is a broad strategy which invests in long and short positions in any of the world's major capital or derivative markets, and across a variety of asset classes, in anticipation of market movements or trends. The portfolios of these funds typically include stocks, bonds, currencies, and commodities in the form of cash or derivatives instruments. These positions reflect views on overall market direction as influenced by major economic and political trends and or events. Most funds invest globally in both developed and emerging markets.

Equity Market Neutral
Equity Market Neutral is a strategy designed to exploit equity price inefficiencies through balanced long and short positions in related equities that insulate the portfolio from overall market risk. Market neutral portfolios are designed to be either beta or currency neutral, or both. Well-designed portfolios typically control for industry, sector, market capitalization, and other exposures. Leverage is often applied to enhance returns.

Long/Short Equity
Long/Short Equity is the most common hedge fund strategy. This directional strategy involves equity-oriented investing on both the long and short sides of the market. The objective is not to be market neutral and depending on the mix of long and short positions the portfolio may have a long bias or short bias. Managers have the ability to shift from value to growth, from small to medium to large capitalization stocks, and from a net long position to a net short position. Managers may use futures and options to hedge. The focus may be regional or sector specific.

Managed Futures
Managed Futures is a strategy that attempts to capitalize on directional movement in global futures, options and forex markets, and in which successful performance does not depend on continued upward movement in traditional equity or bond markets. Strategies are typically diversified across a range of the most liquid futures markets, including financials, foreign exchange, energies, metals, and physical commodities. The most common form involves the use of a systematic, trend-following approach to trade a widely diversified range of markets and contracts based on identified trends. Typically, this strategy is considered among the least correlated of strategies related to traditional investments such as stocks and bonds.

Fund of Funds
Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio. A manager may allocate funds to numerous managers within a single strategy, or with numerous managers in multiple strategies. The minimum investment in a Fund of Funds may be lower than an investment in an individual hedge fund or managed account. The investor has the advantage of diversification among managers and styles with significantly less capital than investing with separate managers.

Distressed Securities
Distressed Securities are event-driven strategies which invest in, and may sell short, the securities of companies where the security's price has been, or is expected to be, affected by a distressed situation. This may involve reorganizations, bankruptcies, distressed sales and other corporate restructurings. The securities of companies in distressed or defaulted situations typically trade at substantial discounts to par value due to difficulties in analyzing a proper value for such securities, lack of street coverage, or simply an inability on behalf of traditional investors to accurately value such claims or direct their legal interests during restructuring proceedings. Depending on the manager's style, investments may be made in bank debt, corporate debt, trade claims, common stock, preferred stock and warrants. Leverage may be used by some managers. Fund managers may run a market hedge using S&P put options or put options spreads.

Emerging Markets
Emerging Markets is a strategy which involves equity or fixed income investing in emerging markets around the world. Funds typically invest in securities of companies or the sovereign debt of developing or "emerging" countries. Investments are primarily long. "Emerging Markets" include countries in Latin America, Eastern Europe, the former Soviet Union, Africa and parts of Asia.