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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.
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.
Direct investments into private companies. Managers look to add value through improvements to operations. Private equity offers the potential for enhanced diversification and returns.
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 is a category of private equity, which is focused on early-stage and emerging businesses that have high growth potential.
Physical assets that have real value, as they have substance. Examples include: commercial and residential properties, metals, art and equipment.
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.
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.
Alternative investments are useful investment strategies for investors looking to diversify their portfolios from traditional funds.
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.
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.
*Source: Preqin
^Source: EG
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