4 exotic investments for diversification

Hedge funds
3 of 6

Hedge funds, which use more complicated investment strategies than most mutual funds, have often outperformed their more conservative brethren. The Morningstar 1000 Hedge Fund Index rose 17 percent this year through Oct. 30.

You need a net worth of $1 million or annual income of $200,000 to invest in a hedge fund, so they aren't accessible to small investors. Hedge fund managers also charge large fees -- as much as 22 percent.

But some mutual funds use hedge-fund strategies. For example, there are mutual funds that only short stocks, and ones that go long and short. There's even a fund that engages in merger arbitrage. The simplest form of merger arbitrage would be to buy shares of a target company in a merger and to sell shares of the acquirer.

You can also invest in ETFs that seek to match an index based on a number of hedge fund strategies, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets.

Global macro, the style used by hedge fund legend George Soros, entails betting on a macroeconomic trend anywhere in the world, such as a declining currency.




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