alternative investments

Many investors believe alternative investments are a narrow and relatively illiquid asset class. But the world of alternatives is full of interesting opportunities which can be a powerful hedge against falling interest rates and can help investors achieve greater portfolio diversification and boost returns.

What are alternatives?

Let’s take a few steps back, and take a look into what alternative investments actually are. 

We’ve all heard of the traditional categories of cash, bonds and stocks. An alternative investment is any investment that falls outside of these categories and are generally categorised into 1) Tangible Assets (such as real estate and fine art) and 2) Financial Assets (such as venture capital and private equity). 

We look into each of these classes in more detail below.

private equity

Direct investments into private companies. Managers look to add value through improvements to operations. Private equity offers the potential for enhanced diversification and returns.

Private Debt

Any credit which is not traditional investment grade, sovereign or corporate debt. Examples of private debt include: senior secured loans, bonds, mezzanine loans, stressed and distressed opportunities.

venture capital

Venture capital is a category of private equity, which is focused on early-stage and emerging businesses that have high growth potential.

real assets

Physical assets that have real value, as they have substance. Examples include: commercial and residential properties, metals, art and equipment.

How do alternatives differ to traditionals?

Great question. The primary difference is that alternative investments are not pinned to the public market volatility. This may help lower your portfolio’s volatility, enhance your returns and thereby broaden diversification.

Alternatives

1. Low to medium liquidity 2. Assets live in both public and private markets 3. Low correlation to stock market

traditionals

1. Typically high liquidity 2. Assets are traded on public markets 3. High correlation to stock market

What are the benefits of alternatives?

Alternative investments are useful investment strategies for investors looking to diversify their portfolios from traditional funds.

Alternatives have a low level of correlation with traditional investments and are less exposed to the stock market which means they can mitigate volatility and be used as a way to reduce overall risk of your investment portfolio.

Like any investment, the rate of return for alternatives is not guaranteed, but there is potential for higher yields than that of traditional investments—especially during periods of low interest rates.

Because alternative investments are so diverse, you have plenty of opportunities, which are not accessible with traditional investments. Besides stocks and bonds, you can invest in real estate, your favourite NFL star, fine art or start-up business ideas.

Misconceptions

Alternative investments are useful investment strategies for investors looking to diversify their portfolios from traditional funds. 

However, there continues to be many misconceptions about alternatives investments – despite there being nothing new about them. In fact, alternatives have existed for decades. 

Misconception: Alternatives are excessively risky.

REALITY: While it’s true that alternative investments have risks, these investments are in fact designed to mitigate risk and manage volatility over time when used as a component of a diversified portfolio. 

Misconception: Alternatives will magnify volatility of a portfolio.

REALITY: In comparison to traditional investments, alternatives have historically low to moderate correlation of returns. In fact, diversifying a traditional investment portfolio with appropriate alternative investments may help reduce overall volatility of a portfolio.
 

Misconception: Alternatives are illiquid and therefore risky.

REALITY While alternatives have varying levels of liquidity, this is usually balanced by improved returns. 
 

MISCONCEPTION: INVESTORS CANNOT ACCESS THEIR money if they invest in alternatives

REALITY: The liquidity of alternative investments depends on the individual investment. However, many alternative investments pay regular distributions and can have short investment terms, particularly in the private debt space. 

A Quick Snapshot

Alternative assets industry predicted to hit US$14 trillion by 2023*

Private debt market is predicted to reach $1.4 trillion by 2023*

*Source: Preqin
^Source: EG

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