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Most of us want to be rich. We believe that the rich know some secret that the rest of us don't. Much like they believe that someone who plays the piano well has some kind of special gift that frees them from the thousands of hours of hard practice that we normal people have to put in to develop what skill we have. This despite research paper after doctoral thesis after peer reviewed article that demonstrates that they way to do well with investments is to put as much money as you can into a range of index funds in equities and bonds over a long period of time.

But we know there are traders who make untold millions engaging in activities and strategies more active than that. Can't we learn them and tap into that ocean of wealth? You know, can't we just dip our toe into the vast ocean of dollars flowing through the markets and get to easy street faster and get a better address?

This interesting, informative, and entertaining book by Ben Stein and Phil DeMuth gives you a tour of Alternative Investments. That is things to invest in and investment strategies other than the standard 60/40 stock fund / bond fund mix you have been used to. While they cover the basic strategies in the brief introduction, I encourage you to also purchase and read the authors' "The Little Book of Alternative Investments" The Little Book of Bulletproof Investing: Do's and Don'ts to Protect Your Financial Life (Little Books. Big Profits)to get a good grounding on sound investment strategy and why it is sound. Then come back to this book so you can step off the safe and well marked path and wander deeper into the investment casino. One of the great services the authors do for you is to make clear who you are sitting down at the table to bet against and why the odds are stacked against you. You know that old adage about sitting down at a poker table and not being able to see the sucker? Yeah, it's you here, too. That is, unless you don't try to take on the guy with a super computer and a Ph.D. from MIT directly, but to use new products that act much like hedge funds and can be purchased rather cheaply. And since they tend be broad based across market sectors you get some protection from the greater variability individual investment might have.

Their first chapter shows you what Alternative Investments are. They show you clearly why what you thought was diversification is just investing in market segments because you own stocks. Stocks in the broad market and stocks in overseas markets are still stocks. And when you get the kind of massive downturn we just went through they all tend to move in the same gut wrenching direction. They point out that holding cash is, in many ways, the ultimate alternative investment. In the second chapter they show you the importance of weighting your portfolio by risk rather than just in dollar allocation. Read this chapter closely.

One of the fads in alternative investing is "collectibles". The problem is that most of them available to you and me are just mass produced items and are not going to become valuable. I love the Stein's and DeMuth's descriptions of how the art markets really work and their noting that it most difficult to convert money into beauty and then back into money. So, if you get emotional pleasure from investing in collectibles and are happy with that as your return, then do it. But not with a view to getting rich anytime soon.

Chapter four gives you a tour of investment horrorshows that are designed to benefit a variety of people other than you. Just remember that all important question, "if this is such a great deal why are they selling it to me for my supposedly worthless dollars rather than keeping this great stuff for themselves? Chapter five gives you a tour of the realities and difficulties of the commodities markets. And chapter six gives you the royal tour of real estate and why REITs can be great for people who want to invest in real estate without having to do the work of collecting rents, unstopping toilets, and insuring the properties.

Chapter seven takes you into the realities and exposes the myths of hedge funds and why you and I can't expect to really play in those markets unless with have many tens of millions of dollars to play with. But chapter eight is a very nice primer on the benefits of hedging your portfolio. There are now funds of hedge funds you can invest in rather cheaply as a kind of hedge fund lite. The authors call chapter nine a field guide to hedge funds. They give you a tour of the strategies various kinds of funds take and what that can mean to you. Chapter ten deals with arbitrage and how the term has been debased. But certain funds are based on it and they have certain characteristics. Chapter eleven examines some funds the authors like but they are clear that these funds do not represent all good funds nor do they pretend that these funds are any kind of magic bullet. I especially like the way the authors urge you to spend 70 to 100 hours in your own study of the funds you consider. Sadly, too many people spend more time deciding on a refrigerator than they do in placing their life savings.

The funds the authors examine just illustrate the ideas the authors are laid in this book. I especially liked and urge you to pay close attention to the "roll your own" alternative hedge fun. They explain how they came to pick those stocks in a previous book and how they performed in the recent unpleasantness. Yes, it fell. But it turns out not as much as the market in general and other funds in particular. They also explain how they would rebuild the fund in today's market. All important and useful concepts to read and think about.

The last chapter takes you through a fund beauty pageant and shows you're their performance over time. This should help you get a feel for how funds might behave the real world. Sadly, it's not all ice cream sundaes and weight loss.

This is a terrific and interesting book that I think you should read before you dash into these fashionable investments and are beguiled by sweet talk and gauzy amply filled sweaters. This is your precious hard earned money that you have left after taxes and living expenses. Don't give it away. Stein and DeMuth want you to keep it, protect, and grow it responsibly.

Reviewed by Craig Matteson, Saline, Michigan
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on August 9, 2011
The Little book of alternative Investments is not for the little guy. The book contains some useful discussion, but largely it was a waste of money - Average investors get no help here. Yes, the "book" is about alternative investments, but an overwhelming part of discussion addresses hedge funds. Message to Ben and Phil: To invest in hedge funds, one has to be an accredited investor which means individual investor net worth, or joint net worth with the person's spouse, must exceed $1 million. As well, accredited investor income must be at minimum, $200,000 in each of the two most recent years, or joint income with a spouse must exceed $300,000, with a reasonable expectation the same income level will continue. To be fair, on page 113, the authors make a brief reference that "we don't want to forget about the little people." Here, the authors explain how investors who are not accredited can participate by purchasing a hedge fund "fund of funds", which is a mutual fund, and to their credit, they mention that those investing in such mutual funds will need to pay another layer of fees, on top of what the hedge funds managers' charge. I bought the book based on trust the authors would perform, but was disappointed. Had the book had an index, and if it were available, it would have been a heads-up, not to buy the book.
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on March 31, 2011
I have been reading Stein and DeMuth for many years and I have become personally convicted to their philosophy of investing, which continues to progress. I became convinced when I read some stuff by Harry Markowitz. Markowitz had been touted in one of their books. I had been investing for years with typical poor results and the AH-HA moment was to come to the realization that a portfolio need to be managed as a whole, not as a bunch of individual little piles of ideas. It's not own a house, and own some bonds, and own some IBM and GE or Contrafund and on and on, but to view all the "money" you have as a single unit of wealth and then ask the question how do I most efficiently manage this unit. Markowitz's bright idea was to develop an efficient frontier based on optimized risk vs reward for the entire portfolio. This included choosing investments that also managed diversity and cost, and controlling volatility by diversification. By optimizing each investment in the portfolio on a risk adjusted basis and it's correlation to the rest of the instruments in the portfolio the sum of the portfolio became more efficient than the risk reward of each of its parts SHAZAM! More bang for the buck!

The recommendation was then to ditch all the stock pickers and mad money grinners (salesmen one and all, more interested in feathering their nests than yours) for buy and hold passive investments and by proper diversification across the universe you could risk adjust your return. Next Quant was added to the mix. Monte Carlo engines that would run hundreds of scenarios on the instruments in the portfolio varying first this and that and then spreading out the most probable outcome and the standard deviation of other outcomes and listing them in order of likelihood. This technique allows you to "worse case scenario" your financial plan to some given percentage out into the future. The scenarios would not take into account things like getting hit by a meteor but they would give you some idea what would happen in the case of the 100 year flood, or living to 100. With that analysis you could figure some idea of how long the nest egg would last over a life time of retirement and how aggressively you could tap that egg. It also gave you a means to re-assess your plan so you would never run out of money, yet efficiently spend what you have invested, and enjoy the fruit of your good planning.

Using these tools you could come up with a simple investment plan based on passive funds that would make money when times are good and not loose as much money when times are bad. If you loose 50% you need to make 100% to get back to even. If you loose 25% you only need to make 33% to get whole. Over the years if you make market return with less than market risk and the cost of doing business is kept to a absolute minimum YOU WIN.

To increase diversity you add assets like bonds, commodities and REITS, which are considered alternative to stocks. They are especially diversifying because they hold low correlation to stocks. But again in the previous books these have been added as passive low cost funds or ETF's. It was either/or. Either you invested in Contrafund and paid the piper (Fidelity) the cost admission OR you bought the low cost Van Guard ETF VTI. With this book is introduced the notion of buying alternative funds that provide some access to hedge fund strategies. Hedge funds tend to try and balance themselves in a way to not be correlated to stocks, just what you need to increase the diversity and reduce the risk. In addition some of these funds use active market strategies such as being able to go short and long, or they may do different kinds of arbitrage and they may arbitrage in ways that are independent of whether the market as a whole is going up or down. These funds can set up these trades in a wide variety of instruments like credit spreads, currency spreads, or various derivative combinations and the money is made over a billion little trades making a penny here and a nickle there. They may include plays on momentum, and a whole variety of ways to make money that are not strictly based or even remotely based on how the Dow is doing. The whole portfolio performs better because the march upward is relentless and the occasional fall into the ditch is mitigated. The cost of these alternative instruments are a little more expensive, and the style is not passive. This is why I call this method BOTH/AND you use both passive cheap investments and a little more expensive active investments both combined using the quant method to realize a more efficient Markowitz frontier, aka over time more bang for the buck. Using Stein and DeMuth's methodology you can get on the elevator at what ever level you like. From simple do it yourself portfolios to joining forces with a investing professional who charges a set fee and does not make his money by selling you crap designed to line his pockets and not yours. This style of investing is not "easy" as in the sense of ordering from a Chinese menu (one from Column A, one from Column B and C and with 5 orders you get eggroll). It does require some active participation and some active understanding of what the hell you are doing. This book goes a long way to begin to instruct you on what the hell you are doing.

Over the past several years I have migrated my entire portfolio to this style, so my money is where my mouth is, and I am well pleased. The book is a fun read but there are some parts that can be a little hard slogging, BUT that is the point of learning. If it was all easy you would already know it and learning this stuff will make you smarter than any talking head on CNBC.
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on March 22, 2011
This is a fun, intelligent introduction into the world of alternative investing. Reading their books never feels like work, but I always learn a lot. The authors are world class debunkers and in the world of alternative investments, they have found much to debunk. Their ideas will almost certainly save their readers from losing a lot of money and just might help them make a bit too. The Little Book of Alternative Investments: Reaping Rewards by Daring to be Different (Little Books. Big Profits)
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on June 23, 2011
In this latest installment in the "Little Book" series, Stein and DeMuth do a decent job of making the sometimes Byzantine world of alternative investment strategies accessible to the average retail investor. There is a secretive, carefully-crafted mystique that pervades the world of alternative investments, and the authors hack through this hype to explain the nuts and bolts of what hedge funds, commodities traders, and other alternatives managers actually do. They then offer readers cheaper "do it yourself" alternatives ranging from new mutual fund and ETF products that mirror hedge fund strategies to a portfolio of low-beta, low-correlation common stocks.

Perhaps most importantly, Stein and DeMuth encourage readers to keep alternatives in proper perspective. The core of most investors' portfolios should be an allocation to stocks and bonds. Alternatives can add diversification benefits and can enhance returns. But most alternatives strategies will not be sufficient alone or even jointly as a portfolio.

In his typical dry sense of humor, Stein writes, "it has been observed that polygamy is a crime that is its own punishment. However, the opposite is true when it comes to investing. You want to have your lawfully married wife--the 60/40 [stock/bond] portfolio, as it were--but then you want to have as many mistresses as you can, in the form of diversifying, uncorrelated assets. Sure, the 60/40 will be jealous that you are spending your money elsewhere, but you will be happier and richer as a result."

Overall, I consider this a decent effort and a worthwhile read for a retail investor with unanswered questions about the world of alternative investments.
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on July 4, 2011
One reason for the popularity of auto racing, aside from the thrills and spills, is that it serves as a test bed for new automotive technologies. Those that prove their worth in the rough and tumble of racing eventually find their way to the luxury car market. After a period where the technology is refined and costs decline, it makes its appearance in the broader market. Anti-lock brakes may be one example of this progression of technology from laboratory to garage.

Something akin to this dynamic may be occurring in the investment world. Researchers in academia develop theoretical models to achieve risks and returns that are relatively uncorrelated with the traditional stock and bond markets. The combination of such "alternative" strategies with conventional stock and bond investments should, in theory, capture most of the market return with less volatility than a conventional 60/40 stock/bond portfolio. Hedge fund managers, ever mindful of competition with their peers for assets, put these theoretical approaches to a real-world test for wealthy clients. Eventually, those strategies demonstrating their worth appear in funds available to the small investor. Bear in mind that we are talking about funds that employ hedge fund strategies, not funds making concentrated bets looking for spectacular gains.

The trick then is how small investors can use these new funds to improve their own investment performance. Where do we go to learn about these products and their potential benefits? Admittedly, hedge fund strategies are complex and most discussions of this topic do more to confuse than enlighten. Fortunately, authors Ben Stein and Phil DeMuth come to the rescue with their latest collaboration titled "The Little Book of Alternative Investments."

With their trademark touch of humor, Stein and DeMuth introduce us to ten recognized hedging strategies. We learn what they are and why they have the potential to improve a conventional portfolio. The authors also name names and list several relatively new mutual funds and ETFs that they feel are worthy of consideration. Most importantly, their discussion is not peppered with the hyperbole found in late night infomercials. They emphasize that they are not advocating that you run out and buy something. Rather, their goal is to whet your appetite so that you will be encouraged to learn more and decide for yourself whether these funds would be useful to you. Employing alternative investments is not a guarantee that your portfolio will never decline in value. You need to temper your expectations and become knowledgeable to use these investments successfully. To quote from the text: "Our first great idea is: Do nothing at all. Just because an investment idea exists, it does not mean that you have to chase after it. The idea needs to persuade you that it is better than what you are already doing."

Before we can even consider alternative investments, however, we need to get our financial house in order. The authors remind us how important it is to first eliminate our credit card debt, save regularly, gain exposure to conventional asset classes using low cost index funds, and rebalance regularly. Only then are we are ready to consider our first foray into "alternative" investments with REITs and commodities. These asset classes are available as low cost indexed products so it is relatively easy to add them. At this point you should have a solid portfolio that should serve you well over the long term. However, if you wish to travel further, then the remainder of this book will be useful to you.

Surprisingly, the authors do not advocate investing directly in either hedge funds or hedge funds-of-funds. The newer funds they discuss use hedge fund-like strategies, but are not hedge funds themselves. One advantage for the small investor is that they are regulated like conventional mutual funds. One disadvantage is that they are new and lack meaningful track records. The performance of alternative investment strategies in a mutual fund format is relatively untested.

Such funds do not come cheap. Do not expect to pay a few basis points in expenses like you can with a Vanguard index fund. This does not mean that costs don't matter - they do. But managing the risks and correlations of a fund employing alternative investment strategies is complicated and the professionals involved can't be expected to work for peanuts. Do the benefits outweigh the costs? According to the authors, many investment professionals would say yes.

So, if you decide to go this route, how do you proceed? The chapter titled "Adding Alternative Investments to Your Portfolio" should help answer some of your questions. It considers what percentage of your portfolio might reasonably be allocated to alternatives and where the money might come from - stocks or bonds or both. As usual, every investor is unique and the answers will depend on your circumstances.

New financial products are being developed for the retail marketplace which promise to provide returns and associated risks that are not highly correlated with the traditional stock and bond markets. This should, in theory, attenuate the volatility of conventional portfolios and improve risk-adjusted returns. Over long periods even marginally better returns can compound into significantly superior results. But perhaps most importantly, less volatile portfolios might make us less likely to commit the cardinal sin of investing by abandoning our equity investments after market downturns. If these newer funds can help us stay the course, they will be worth the price. Stein and DeMuth have gazed into their crystal ball and see a future where well-engineered alternative investments sit side-by-side with index funds in the portfolios of successful investors.
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on March 23, 2011
This has been a great series for value investors. It includes some of the great value investors of our time, such as Joel Greenblatt and Chris Browne. But for retail investors who want to figure out how they can take advantage of what hedge funds do, then The Little Book of Alternative Investments: Reaping Rewards by Daring to be Different (Little Books. Big Profits)is the book. It is the best of a great series. If you're read it and liked it as much as I have, you might consider the others, too.
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on January 9, 2015
I found this book to be mostly collection of pretty common advice. The unusual part about hedge funds merely said that lots of people are making money this way, so you should have some. There was nothing about evaluating funds. In 2014 many hedge funds went under. I gave it away.
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on August 6, 2011
Without being a dry academic tome, this book clearly explains the role of alternative investments in an investment portfolio. It explains what works, and why, and how much you need -- as well as explaining what does NOT work. It explains how hedge funds work, and the explanation is clear enough that a lay person can understand. It even suggests a few specific securities to consider as "starting points" (not recommendations) in your search. The authors attempted to be humorous (a good thing), but were a little too folksy for my personal taste.
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on November 1, 2012
This is a very good introduction to hedge funds. Other alternatives to the standard stock/bond split are not as well recommended. The authors express ambivalence towards gold , real estate and commodities. They are derogatory of collectibles, venture capitalism, buy-write funds and structured products. The result is that none of these investment types are as well explained in the book as are hedge funds.

The book explains the different types of hedge funds: event driven, global, futures and arbitrage. There is a useful tabulation of prospective choices along with costs. For those of us that might be interested in making a choice, this can be only a beginning. This is a rational approach, not another euphoric recommendation of an investment vehicle. Stein and DeMuth analyze both prospects and risks. They properly advise caution and due diligence in investment decisions.
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