Alternative Investments

What are alternative investments?

More investors are shifting to alternative investments, generally referred to as alternatives, yet many still view them as an exclusive, narrowly defined class of investments. This is far from the truth. Alternatives come in a variety of packages and encompass a wide range of assets and strategies. Alternative solutions can be a powerful tool to help investors achieve growth, reduced volatility and diversification.

What do we consider alternatives?

Alternatives are investments in assets other than stocks, bonds and cash, such as private debt, hedge funds, private equity commodities, collectables, infrastructure, real estate, and structured products.

Why should I consider alternative investments?

A traditional “60/40” allocation to equities and bonds may no longer be enough to meet long-term investment goals. Alternatives can help to lower volatility, enhance returns and broaden diversification of a portfolio.

Benefits of investing in Alternatives

Because alternatives tend to behave differently than typical equity and bond investments, adding them to a portfolio may help to lower volatility, provide broader diversification, and enhance returns.

Lower volatility

Alternatives rely less on broad market trends and more on the strength of each specific investment; hence, adding alternatives can potentially reduce the overall risk of a portfolio.

Broader diversification

With lower correlation to traditional asset classes, alternatives can be a beneficial way to diversify your portfolio.

Enhance returns

Alternatives can improve the risk and return profile of a portfolio and enhance total return through access to a broader universe of investments and strategies.

Integrating alternatives into your portfolio:
Content vs. containers

Alternative Investments share a number of characteristics and objectives. However, it is important to recognize that there is wide latitude within the category of “alternatives”.

One useful way to compare alternatives is to consider their “contents” and “containers.”

Contents can be either the assets themselves (e.g. currency or real estate) or the investment strategy employed (e.g. long/short strategy or event driven strategy). Either way, the contents determine how individual investments might be expected to perform relative to traditional investments.

Containers define the vehicles in which investments might be found, such as hedge funds, private equity funds and mutual funds, all of which are structured differently for a variety of management, liquidity, legal and regulatory reasons. Hedge funds, for example, are categorized together because their goal is to mitigate (“hedge out”) certain risks inherent in other asset classes, not because their contents are all the same.