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Alternative Investments
An 'Alternative Investment' is an investment that is not in one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.
Many alternative investments also have high minimum investments and fee structures compared to mutual funds and ETFs. Alternative investments are favoured mainly because their returns have a low correlation with those of standard asset classes. Because of this, many large institutional funds such as pensions and private endowments have begun to allocate a small portion (typically less than 10%) of their portfolios to alternative investments such as hedge funds and managed accounts.
While the small investor may be shut out of some alternative investment opportunities, real estate and commodities such as precious metals are widely available
Forex is the short form of Foreign Exchange. It involves nothing else but the most basic and fundamental commodity of the world: Money. Whenever a transaction takes place in Forex market, it is nothing but an exchange of one form of money for another. It is like a barter system where you give one currency and get another one in return. Every time a company or government buys or sells products and services in a foreign country, they are subject to a foreign currency trade; the exchanging of one currency for another.
Many individuals and organizations also trade currencies for speculative purposes. With all of these currency transactions going on daily, it is no wonder that the foreign currency exchange market, also known as "Forex" or "fx" market, has such a huge global reach and has become extremely popular among traders.
Trillions of dollars of foreign exchange activity takes place every day. From 1997 to the end of 2000, daily Forex trading volume surged from US$5 billion to US$1.5 trillion. The current (2008) volume stands at US $3.8 trillion everyday. If you compare its trading volume to that of the New York Stock Exchange, it is about 80 times bigger. The Forex market continues to grow at a phenomenal rate.
Until 1990s, before the internet came along, only corporations and wealthy individuals could trade currencies in the Forex market through the use of the proprietary trading systems of banks. These systems required as much as US$1 million to open an account. Thanks to advancements in online technology, today investors with only a few hundred dollars can have access to the Forex market 24 hours a day. Infact these days you can open a FX account with as low as USD $25 deposit.
For traders, Forex trading provides an alternative to stock market trading. While there are thousands of stocks to choose from, there are only a few major currencies to trade (the Dollar, Yen, British Pound, Swiss Franc, and the Euro are the most popular). Forex trading also provides a lot more leverage than stock trading, and the minimum investment to get started is a lot lower. Add to that the ability to choose flexible trading hours (Forex trading goes on 24 hours a day) and you have the reason why so many stock traders have flocked to day trade currencies.
24-hour Forex trading
Forex is a true 24-hour market. Whether it's 6 PM or 6 AM, somewhere in the world there are buyers and sellers actively trading foreign currencies. Traders involved in Forex trading can always respond to breaking news immediately, and profit and loss is not affected by after hours earning reports, analyst conference calls, nor trading stoppages due to "pending news" or announcements.
Superior liquidity
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the Forex markets. The liquidity of the Forex market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price. This is a huge advantage of Forex trading.
Because of the lower trade volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
Leverage in Forex trading
100 to 1 leverage is commonly available from online Forex dealers, which substantially exceeds the common 2:1 margin offered by equity brokers, and 15:1 in the futures market. At 100:1, traders post $1000 margin for a $100,000 position, or 1%. Increasing leverage increases risk.
While certainly not for everyone, the substantial leverage available from online Forex trading firms can multiply both gains and losses. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.
Lower transaction costs
It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees.
Commissions for stock trades in the online discount brokerage world typically range from $7.95-$29.95 per trade, with full service brokers typically charging $100 or more per trade. An average commission on a futures trade is $15 a round turn. Forex brokers offer much lower commission structures. Thus, investors involved in Forex trading could limit their cost.
Equal profit potential in both rising and falling markets
In every open Forex position, an investor is long in one currency and short in other. A short position is one in which the trader sells the base currency in anticipation that it will depreciate. This means that, in Forex trading, potential exists in a rising as well as a falling market.
The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale. This limitation does not exist in Forex trading.
A hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of investment and trading activities than long-only investment funds, and that, in general, pays a performance fee to its investment manager. Every hedge fund has its own investment strategy that determines the type of investments and the methods of investment it undertakes. Hedge funds, as a class, invest in a broad range of investments including shares, debt and commodities.
As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety of methods, most notably short selling and derivatives. However, the term "hedge fund" has also come to be applied to certain funds that do not hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing the return on their investment.
Hedge funds are typically open only to a limited range of professional or wealthy investors. This provides them with an exemption in many jurisdictions from regulations governing short selling, derivatives, leverage, fee structures and the liquidity of interests in the fund. This, along with the performance fee and the fund's open-ended structure, differentiates a hedge fund from an ordinary investment fund.
The net asset value of a hedge fund can run into many billions of dollars, and the gross assets of the fund will usually be higher still due to leverage. Hedge funds dominate certain specialty markets such as trading within derivatives with high-yield ratings and distressed debt.
A managed account is an investment account that is owned by an individual investor and looked after by a hired professional money manager. In contrast to mutual funds and hedge funds (which are professionally managed on behalf of many mutual-fund holders), managed accounts are personalized investment portfolios tailored to the specific needs of the account holder.
Managed Accounts are a fast-growing, fee-based investment management product for high net worth (HNW) and ultra high net worth (UHNW) individuals. They started as Separately Managed Accounts (SMAs) and have since evolved into Multiple Strategy Accounts (MSAs) and the rapidly emerging Unified Managed Account (UMA). The appeal of Managed Accounts is the access to professional money managers, high degree of customization and greater tax efficiencies in a fee-based product. Managed account minimums and the cost to operate managed account programs has steadily dropped as technology helps with efficiency and scale. Increasingly, the managed account products are seeing interest from the "mass affluent" as well.
•Transparency. Unlike mutual funds, you know whats in your account. You can see what you own.
•Profit in both rising and falling markets.
•Balancing your portfolio from foreign exchange trading.
•Professional Forex account management.
•Liquidity of assets - money can be withdrawn at any time.
•Tax management. Your portfolio can be run so that annual state or federal taxes are minimized.
•Competitive fees. Account managers generally charge a flat annual fee rather than full-service brokerage commissions.
•Diversified Forex trading discipline using the major currencies only.
•Performance. Managed accounts often offer the services of top money managers using investment systems with favourable track records.
•Real-time account management and reporting.
•Convenience. If you are too busy to give your investments the attention they deserve or if you are an inexperienced or emotional investor having a professional run your portfolio may be your best solution.
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