Alternative Investments

StateTrust Alternative Investments team is composed of professional investment advisors that have broad capital markets background in hedge fund allocation strategies, manager selection, due diligence and risk management.

We offer a full range of multi-manager portfolios that span the risk/return spectrum and offer unique tailored strategies to help meet our clients' investment objectives.

Our Alternative Investment team utilizes a top-down strategy allocation methodology combined with rigorous manager evaluations and seeks to create hedge fund portfolios with stable risk, return and correlation characteristics over the long term.

Our Alternative Investment team concentrates in the following products:

  • Hedge Funds.
  • REITs.
  • Structured Products.


What is a Hedge Fund?

Hedge funds are basically private investment pools for wealthy, financially sophisticated investors. Traditionally, they have been organized as partnerships, with the general partner (or managing member) managing the fund's portfolio, making investment decisions, and normally having a significant personal investment in the fund.

Hedge fund managers typically seek absolute positive investment performance. This means that hedge funds target a specific range of performance, and attempt to produce targeted returns irrespective of the underlying trends of the stock market. This stands in contrast to investments like mutual funds, where success or failure is often measured in terms of performance in relation to a stock index, like the Dow Jones Industrial Average.


Hedge fund managers use sophisticated investment strategies and techniques that may include, among other techniques:

  • Short Selling - Sale of a security not owned.
  • Arbitraging - Simultaneous buying and selling of a security in different markets to profit from the difference between the prices.
  • Hedging - Buying a security to offset a potential loss on an investment.
  • Leveraging - Borrowing money for investment purposes.
  • Investing in derivatives - Purchasing/Selling options and futures contracts.
  • Specialization - Investing in volatile international markets, privately issued securities or distressed companies.

Managers are paid based on the fund's performance. Performance fees of 20% of profits are common, along with a fixed annual asset-based fee of 1 to 2%.

Hedge Funds and Fund Managers

Hedge funds are an unregulated private pool of investment vehicles, usually supervised by professional investment management companies with limited liability. They do not necessarily stick to any one investing philosophy.

Hedge funds use leverage (borrowing money or securities) featuring long-term and short-term positions. They can invest in small asset classes and are free to change investments at anytime.

Hedge funds call on varying investment strategies. Some hedge funds even utilize more than one strategy at a time—a multiple-strategy approach.

Hedge fund managers traditionally utilize a mix of different strategies such as:

  • Identifying unique opportunities.
  • Playing market risks to successful conclusions.
  • Timing strategies.
  • International trading.
  • Taking advantage of economic and business events, expected or unexpected.
Hedge Fund Group Hedge Fund Group Description
Long/Short Equity Some hedge funds that follows a long-term/short-term equity formula work on buying and selling the right stocks. Other funds concentrate on the direction of the market, going from market short to market long.
Equity Arbitrage Hedge funds that focus on equity arbitrage buy or sell a specific amount of every stock in a particular index then trades on futures.
Equity Pairs Trading With this strategy, hedge funds buy and sell the shares of two comparable companies or similar equities from the same company.
Equity Market-Neutral These hedge funds mix issues from a specific country into complementary long and short portfolios. Trading usually revolves around one major investing theory.
Risk Arbitrage/Merger Arbitrage Hedge funds buy stocks in a company when a takeover is imminent. Performance varies in this category since fund managers take different approaches to dealing with the risk the takeover may not happen and the deal will not be profitable.
Event-Driven Strategies Risk arbitrage is sometimes considered part of a category known as event-driven strategies. These strategies usually draw on corporate events such as mergers, acquisitions, divestments, liquidations, bankruptcies, and reorganizations. Each strategy depends on research to set up deals rapidly.
Convertible Bonds These hedge funds buy convertible bonds or convertible preferred stocks that feature debt, equity, and options characteristics.
Fixed-Income Arbitrage Several hedge funds make huge bets on a combination of risks. These are called fixed-income arbitrage funds. They use foreign equities and forward currency exchange rates to trade between the cash and futures markets, credit and default strategies, yield curve strategies, and synthetic money market vehicles.
Mortgage Arbitrage Often considered part of fixed-income arbitrage funds, mortgage hedge funds deal with mortgage-backed bonds. Freddie Mac, Fannie Mae and the Home Loan Bank transfer mortgages into pass-through securities that are then transformed into collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs).
Emerging Markets The securities of smaller, less developed countries are the focus of hedge funds that concentrate on emerging markets. These investments are generally considered quite unpredictable due to economic and political factors. Hedge funds can work with equities, fixed-income or both.
Distressed Securities Hedge funds in this arena purchase stocks or bonds of companies that have either filed bankruptcy or are close to doing so. Funds usually get securities at huge discounts and sometimes hold onto them for a number of years.
Global Macro Funds Global macro funds invest in stocks, bonds, commodities, and currencies with an eye on broad economic factors, particularly overseas happenings. These funds are considered some of the most unstable.

Features of a Standard Hedge Fund


Characteristics 1999 2000
Average Median Average Median
Fund Size ($ Millions) 87 22 90 22
Fund Age (Years) 5.9 5.3 5.0 3.9
Minimum Investment (US Dollars) $695K $250K $630K $250K
Management Fee (%) 1.7 1.0 1.3 1.0
Performance-Related Fee (%) 15.9 20.0 16.7 20.0
Manager's Experience - Securities (Years) 17 15 17 15
Manager's Experience - Portfolio Management (Years) 11 10 12 10

Hedge Funds' Correlation to the S&P 500 and Volatility

Most hedge funds are usually not correlated to conventional indices such as the S&P 500.  Correlation, which calculates how much the returns on a certain asset are related to the returns of another asset, is the key here. A portfolio that is appropriately diversified*, blends holdings whose returns are not correlated or have a low correlation.


Hedge Fund Characteristics Correlation
to S&P 500
Volatility (%)
CSFB/Tremont Hedge Fund Index + 0.51 9.54
Convertible Arbitrage + 0.11 4.93
Dedicated Short Bias - 0.78 18.89
Emerging Markets + 0.48 19.75
Equity Market Neutral + 0.46 3.34
Event Driven + 0.54 6.36
Fixed Income Arbitrage + 0.09 4.19
Global Macro + 0.29 13.73
Long/Short Positions + 0.61 12.26
Managed Futures - 0.10 11.32
S & P 500 15.09


* Diversification does not guarantee a profit or ensure against loss.

Risk-Adjusted Return (Measurements)

There are several ways to measure Hedge Fund performance, risk and return. Many of these methods are also utilized with conventional investments:

  Sharpe Ratio = (Actual_Return - Risk_Free_Return)
  Sortino Ratio = (Actual_Return - Risk_Free_Return)
  Treynor Ratio = (Actual_Return - Risk_Free_Return)
  Jensen's Alpha = Portfolio_Return - [Risk_Free_Return + (Market_Return - Risk_Free_Return) * Beta]

Fund of Fund Managers

Hedge funds that focus on investing in an assortment of different hedge funds are known as fund of funds. Many of the managers who concentrate on building fund of funds tend towards specializing in one kind of investing, working with international funds, for instance.

Once investment goals have been decided, the manager sets about implementing the investments. First he assesses and chooses money managers, then he creates a portfolio of hedge funds with what he deems to be the appropriate mix of assets.

Finally he institutes a process for monitoring the performance of the selected money managers, as well as keeping the designated portfolio on track by formulating various strategies and re-balancing the assets whenever necessary.

The majority of managers try to achieve absolute returns with as little fluctuation as possible when it comes to hedge funds.  Conserving capital is the name of the game.

Refining the Investing Process for Hedge Funds requires from StateTrust:

  • Appraisal of money managers.
  • Selection of money managers.
  • Building of portfolio.
  • Review of money managers' performance.
  • Strategizing of portfolio development.
  • Reallocation of portfolio holdings.

Real Estate Investment Trusts ("REIT")

REIT is a special type of security that sells like a stock on the major exchanges and that invests in real estate directly, either through properties or mortgages.

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans ("DRIP").

REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.


REITs have two important business responsibilities:

  • Managing groups of income-producing properties
  • Distributing most of its profits as dividends (at least 90% of taxable profit)

StateTrust's  team of professional investment advisors is well qualified and knowledgeable to help clients' structure and distribute Structured Products such as Notes, fixed income in global markets and in multiple currencies.

Structured Investments offer individual investors innovative opportunities to pursue their financial objectives.  They can be used by a wide range of investors as compliments to direct investments or to take advantage of market trends with structures tailored to investors' own specific risk/return profile.

Structured Investments can be used to help clients achieve a wide range of investment objectives, by either potentially reducing the risk exposure of a portfolio or providing access to a variety of underlying assets, including stocks, bonds, interest rates, currencies and commodities.

Investing in Structured Investments involves a number of risks including but not limited to:

  • Fluctuations in the price, yield, interest rates, foreign exchange exposure and credit quality.
  • Substantial loss of principal.
  • Limits on participation in any appreciation of the underlying instrument.
  • Limited liquidity.
  • Credit risk of the issuer.
  • Other events difficult to predict that are beyond the control of the issuer.

An investment in Structured Investments may not be suitable for all investors. Prospective investors should consult their financial and legal advisors as to the risks and suitability of such investments given their particular circumstances.