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Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors, + Website by Robert J. Martorana, Jessica Lynn Rabe

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Chapter 1Definitions and Methodology

Synopsis

This book defines liquid alternatives as hedge fund strategies used in a '40 Act wrapper, and it uses Lipper data to evaluate 11 different alternative classifications. The analysis focuses on the risk and return of each classification, and the 10 largest funds. The methodology uses factor exposures to analyze fund returns, and to identify different roles that liquid alts can play in portfolios. These roles include portfolio diversifier, equity complement, fixed income complement, tactical hedge, and directional bet.

Readers may wish to read this book straight through, skim through the chapter summaries, or use it as a reference tool. Each chapter is written as independently as possible, while adhering to a comprehensive framework for studying liquid alternatives.

Definitions

Alts Democratized defines liquid alternatives as hedge fund strategies in an Investment Company Act of 1940 ('40 Act) wrapper, such as an exchange-traded fund (ETF) or a mutual fund. This description concurs with the 11 alternative classifications used by Lipper, and the definition emphasizes the investment strategy rather than the legal structure.

The term hedge fund strategies includes a broad range of investment vehicles that operate in a different legal structure. Hedge funds are usually pooled vehicles with investments managed in a general partner/limited partner structure, and held by a limited liability company. These funds have fewer restrictions on ...

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