In recent years, I've noticed that the number of music genres on my iPod has continued to expand. What used to be "rock" is now subdivided into alternative rock, indie rock, indie pop, pop rock, industrial rock, country rock, rockabilly—and the list goes on.
While some of these categorizations are useful in understanding what I should expect from my listening experience, many of the descriptors are fairly useless. Specifically, while the majority of artists that I follow fall under the "alternative rock" category, I'm at a loss as to how to describe what that means to someone who has no contextual background—say, my mom, for example.
What I do know is that most of the music I listen to consists of combinations of vocals, guitars and drums. The components are the same, they're just mixed in different amounts, volumes and patterns, and my mom can understand that.
As I think about this, I can't help but see a parallel with the investment industry and the amorphous group of strategies labeled as "alternative investments." How do you explain "alternative investments" to the typical investor who doesn't live and breathe the markets?
You start by recognizing that all investments consist of the same components—asset classes—and that everything we invest in is either exclusively, or in part, equity (guitars), debt (drums), commodity (bass guitars) or currency (vocals).
So where does the confusion come from? It's partly an "asset classes" versus "strategies" issue. Asset classes are what you invest in, whereas strategies consist of the ways in which you invest in asset classes. A traditional, long-only value manager is investing in equities (the asset class) by evaluating the valuation characteristics of each company and buying the cheaper ones (the strategy).
