An investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.
WHY ALTERNATIVE INVESTMENTS?
Yesterday’s portfolios may no longer be enough for today’s challenges. In many cases, the traditional mix of stocks, bonds and cash – the core of modern portfolio theory – has proven more correlated than not in the new global economy.
ALTERNATIVES CAN CAN OFFER OPPORTUNITIES IN TODAY’S ENVIRONMENT
- Alternative investments offer the ability to extract better
relative returns with less correlation to the markets
- Market dislocations and regulations are creating opportunities
across the spectrum of alternatives
- In some instances, investors need to expand their investment
horizon to capture an illiquidity premium
- A well constructed, diversified portfolio of alternatives can provide
attractive risk-adjusted returns with downside and inflation protection
and less correlation to traditional market indices.
ALTERNATIVE INVESTMENT CHARACTERISTICS
Non-traditional asset classes, such as hedge funds, real estate, commodities and private equity, follow different rules than equities and bonds. This is precisely why they can help improve a portfolio’s risk/return profile.
- Risk/return characteristics are above average: Non-traditional investments can offer above-average returns with comparatively low volatility.
- It pays to adopt a longer investment horizon: Some non-traditional investments are long-term, calling for an investment horizon of several years or a holding period corresponding to the length of an economic cycle.
- Stability for the portfolio: Because returns on non-traditional investments depend upon different facts than those influencing traditional instruments, they have a balancing effect on a portfolio.
- Know-how makes the difference: Many non-traditional strategies and investments require solid specialist know- how, excellent market expertise and many years of experience. For this reason, manager selection is critical.