In today's global capital markets, hedge funds are perhaps the most misunderstood area. Media attention has focused on fraudulent managers, creating the misconception that hedge funds are inherently flawed and inordinately risky. Such cases are the exception, not the rule.

Mutual funds are a particular type of investment vehicle, a wrapper or package whose underlying contents vary by asset class or investment style. Similarly, hedge funds are a broad collection of investment strategies that span the entire risk/return spectrum. Many hedge fund strategies are designed as low-risk diversification tools whose main objective is preservation of capital. Indeed, managers literally hedge certain exposures to reduce risk. Meanwhile, other strategies have a greater risk/return profile and are more performance-oriented. The most common characteristics of hedge funds are (1) the ability to invest both long and short using a variety of instruments, including equity and debt securities, futures, options and other derivatives and (2) a performance fee, whereby managers earn a portion of the profits they generate (typically 20%). Moreover, hedge fund managers are generally expected to produce positive absolute returns in virtually all types of environments.

Real assets encompass commodities, real estate and natural resources. Typically, investors are attracted to real assets because they provide an inflation hedge. Institutions have utilized real assets for years, primarily via illiquid private structures in which investor assets are locked-up for years.

As opposed to publicly-traded securities like those in the S&P 500, private investments entail both equity and debt securities for businesses that are privately-owned. Private companies may include early-stage growth businesses (i.e. venture capital) or more established companies, including formerly public entities (i.e. leveraged buy-outs). With private investments, investor capital is usually locked-up for several years. In exchange, investors expect a return premium over public markets.

The universe of exchange-traded funds is rapidly expanding beyond traditional index funds. A variety of unique strategies are now available, allowing investors to express nuanced views while managing risk/reward more effectively. Such ETFs include long/short equity and debt securities, various industry/sector strategies, commodity futures and foreign currencies among others. However, some ETF structures are immensely complex, so careful evaluation is required.