Fortify Your Money... and Play the Markets Like a Hedge Fund Superstar

The bull market just turned 10. Even last year, on its ninth anniversary, we were already in the midst of the longest bull market in history.

And with major indexes still hovering near or above their all-time highs, the current bull market may still not be over.

Or, it could be about to transition to a bear.

Trouble is, we can't be sure either way.

The thing about bull markets is they can have dramatic ends... or they can fizzle out with a whimper, where practically no one even notices a gradual, broad-based decline.

And that's where the really pernicious danger lies.

It's also why, over the next several years, so-called "alternative investments," investments that aren't stocks and that don't tend to correlate with stocks, are much more likely to outperform those conventional holdings.

That makes right now the perfect time to buy - so you're ahead, profiting all the way, when the bull runs out of steam...

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Massive Opportunities Beyond the "Big Three"

Investors overwhelmingly build their portfolios using varying percentages of just three asset classes: stocks, bonds, and cash.

And yet other asset classes or investment strategies can generate plenty of alpha - and outperform stocks, bonds, and cash even before times get tough. Research has proven time and again that allocating to these alternatives can do wonders for a portfolio.

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Not only do they tend to improve returns, they can do so while lowering risk and volatility.

That can help investors avoid losing sleep. Often these investments will either rise as others fall, or at least have smaller drawdowns. Either way, they contribute to overall portfolio stability.

Ideally, we want to include assets that generate a return while not correlating with each other.

So now I'm going to share with you to my "Bigger Three" investments that can go a long way to accomplishing these achievable goals.

A Little Bit "Cash," a Little Bit "Bonds"

I consider my first suggestion a sort of hybrid.

Treasury inflation-protected securities (TIPS) are Treasuries whose yield is indexed to inflation. Their goal is to help shelter investors from the negative effects of inflation.

Remember, as inflation and/or interest rates rise, existing bonds tend to lose value when buyers discount their worth.

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Let's say a five-year bond currently yields 2.4%. Now assume reported inflation numbers rise and the market starts to price in 2.7% as a reasonable yield for five-year bonds. That will mean existing five-year bonds will have to start selling at a discount sufficient to provide a 2.7% yield.

So when interest rates rise, longer-term bonds tend to fall in value. The debate rages on, but many astute investors believe the 35-year bond bull market, where rates fell on balance, ended in mid-2016.

When rates fall continuously, bonds gain in value, so gains come from buying and holding bonds. When rates rise, they lose value, so gains come from shorting.

TIPS, on the other hand, are seen as low-risk because they are U.S. government-backed, and their value rises with inflation. They pay interest semi-annually and come with five-, 10-, and 30-year maturities.

The principle value of TIPS bonds is adjusted for changes in the Consumer Price Index (CPI), while the coupon rate does not vary. Bottom line is these bonds provide an overall yield that keeps pace with the CPI.

If inflation is muted, they rise a little. If inflation is more pronounced, TIPS rise accordingly. They are considered very conservative holdings but provide a yield - unlike cash - and all without the potential volatility or even losses associated with traditional bonds.

TIPS can be purchased directly from the government through the TreasuryDirect.gov system. Once you set up an account, it's not much different from shopping on Amazon.com: easy. Individual TIPS held until maturity will return the original principal plus interest. With a AAA rating, risk is extremely low.

If, for whatever reason, you choose not to open a TreasuryDirect account, you can simply hold the iShares Barclays TIPS Bond Fund (NYSEArca: TIP) exchange-traded fund (ETF).

Be aware, though: This ETF is not without some risk. All its holdings are AAA-rated, it's true, but its TIPS are spread across maturities, which, at any given point in time, can temporarily decrease in value depending on inflation; shorter holding periods can lead to a small negative return.

So if you go the ETF route, plan to hold it for at least two to three years to mitigate any potential downside, however slight.

The next play might not even take notice of any downturn, though...

Tap into "Extreme Alpha" Potential

Hedge funds are a much-maligned group. Their managers are often seen as rich, greedy Gordon Gekko types.

In the film "Wall Street," Gekko was a corporate raider, buying struggling companies and selling them off in parts to profit.

But that's just one very narrow hedge fund strategy for making money. There are hundreds, perhaps thousands, of others. They include long/short equity, market neutral, convertible arbitrage, distressed investing, special situations, fixed-income arbitrage, global macro, and risk arbitrage - to name just a handful.

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Thanks to their particular strategies, many hedge funds chose not to rely on rising markets. Some take no cognizance of market direction at all.

Instead, they seek to generate a return no matter the vagaries of major indexes.

Hedge funds typically require very large minimum investments, require long lock-up periods, and charge a fixed management fee on capital plus a portion of profits. The most common compensation scheme is the "two and twenty" - 2% of funds, plus 20% of returns generated.

So hedge funds themselves might be off the table for most investors, but hedge fund strategies are widely available to those prepared to make more modest allocations.

These days, there seems to be an ETF for everything...

The ProShares Hedge Replication ETF (NYSEArca: HDG) is the most straightforward way you can have your own slice of a fund of hedge funds.

HDG seeks the investment results of the Merrill Lynch Factor Model, which is highly correlated to the HFRI Asset Weighted Composite Index.

There are seven main underlying hedge fund categories: event-driven, equity hedge, interest rates, fixed income, macro, market timing, and emerging markets.

There are other high-profit operators to look at, as well...

Become a Private Equity Player Yourself

My third idea is to buy shares in Brookfield Asset Management Inc. (NYSE: BAM). The company is a $44 billion, 120-year-old Canadian alternative asset manager.

Brookfield are value investors, buying and operating long-life high-quality businesses at favorable valuations, financing them on a long-term, low-risk basis.

And managers have their interests aligned with investors', putting their own capital into each deal.

The company has $30 billion in assets, many being real assets offering protection against economic downturns. It's mainly infrastructure, renewable power, and real estate. What's more, its assets provide broad geographical diversification - there's always a bull market somewhere.

Debts are typically conservative and denominated in local currencies. Infrastructure revenue is also hedged with inflation escalators in local currencies.

Private equity has been soaking up huge amounts, and institutional investors have increasingly large sums to allocate. But thanks to the strict mandates of those investors, there aren't that many firms able to accept fund allocations.

In order to better meet those strict requirements, Brookfield has just agreed to buy a 62% stake in Oaktree Capital Group LLC Unit Class A (NYSE: OAK).

Oaktree Capital manages $120 billion in distressed debt, private equity, real estate, infrastructure, and other equity assets. This goes a long way to complement Brookfield, boosting its credit business while providing real asset exposure to Oaktree.

Brookfield has been a stellar long-term holding, generating more than 20% annually over the past decade.

The company boasts an extensive and impressive track record, focuses on real assets, and has just diversified further through Oaktree.

In my view, BAM makes for a great portfolio holding, likely to generate plenty of alpha for years or even decades to come.

In fact, all of these holdings make for dynamite alternatives to the traditional "Big Three" investments, especially when the future of the bull market is very much in doubt.

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