NEW YORK -- With uncertainty building over where the economy is headed, some investors are jumping into new strategies hoping to ride out some of Wall Street's gyrations. But though exploring different corners of the market can reap benefits, there is no place free from some level of risk.
From commodity and currency funds to strategies aimed at profiting from volatility, investors are moving into areas or using plays that a decade ago were largely only available to professional investors. The opportunities can add diversity to portfolios, though investors should understand where they are putting their money.
With Wall Street routinely having hiccups in the form of triple-digit swings in the Dow Jones industrials, it's understandable that some investors are venturing into new territory.
Fred Penney, an investor in Grand Falls-Windsor, Newfoundland, began shorting several stocks, placing bets they would go lower, for the first time a week ago as a way to ride out a difficult market.
"Those are things that I hadn't done before," he said, adding that the moves have helped him make up for declines in some of his other holdings.
"I've got a feeling that we are going to be in a sideways market for a while. It seems as soon as we get a little rally, everyone takes their profit and it goes back down again," he said. "This market I find extremely challenging."
Other investors also appear to be weary of the stock market's indecision in recent months. David Reilly, director of portfolio strategies at Rydex Investments, said the volatility and uncertainty have led some to new investment areas.
"We're seeing good growth in some of our newer alternative product suites," he said.
The Rydex Managed Futures Strategy Fund has seen its assets balloon to about $400 million from $245 million at the end of 2007.
The fund tracks the Standard & Poor's Diversified Trends Indicator, which attempts to capture price trends of various futures markets.
The indicator is based on 14 commodity and financial futures sectors and is evenly balanced between the two.
Commodities draw investors
Investments that have lately shown more reliable advances than stocks are drawing more money. Oil, for example, recently hit new highs and has gone above the level seen in 1980, when adjusting for inflation. Gold, meanwhile, has neared the psychological barrier of $1,000 an ounce, and there have been record prices on everything from platinum to soybeans to corn.
Many investors cheer such gains, but they should keep in mind that commodities are known for their volatility. Backers say surging demand from countries such as China and India warrants the run-up in prices; others say prices have risen too far, too fast as those seeking a fast buck have moved into the market and created a bubble.
Whatever the case, investors considering moving into new territory to round out their portfolios should seek answers from a financial adviser to determine whether it is wise, said Jeff Tjornehoj, an analyst at mutual fund tracker Lipper Inc.
"Some investors are using these opportunities very wisely. They are allocating their portfolios into areas of the market that they were previously unexposed to. That can be good when used to proper amount. On the other hand, I get the sense that a lot of investors view these assets as the only opportunity out there, so they are completely loaded up on commodities, for instance," he said.
And many investment areas or trading strategies are designed to account for only a small portion of a portfolio, not necessarily the bulk of it. The dangers of making big wagers should be clear to investors who remember the tech stock meltdown at the start of the decade.
"If people are not seeing that what goes up may eventually come down, then they will have learned nothing from the last bear market," Tjornehoj said.
He said not all alternative investments are suited for every portfolio and that many investors might not be comfortable with the attendant risks and volatility.
"It could be like a drug in the hands of a qualified doctor: It saves lives and prevents misery, but to the uninitiated it could be deadly."