Alternative investments refer to assets and investment strategies outside of traditional asset classes like stocks, bonds and cash. As the articles mention, some examples of alternative investments include private equity, venture capital, hedge funds, managed futures, real estate, commodities and derivatives contracts. There has been growing interest in alternative investments in recent years among individual and institutional investors looking to diversify their portfolios and tap into new opportunities. However, alternative investments also come with more complexity, illiquidity, and questions around risks, returns and fees compared to traditional investments. This article aims to provide key information and conclusions to common questions investors have around alternative investments.
What are the main alternative investment categories and strategies?
As outlined in the articles, the most common categories of alternative investments include private equity, venture capital, hedge funds, managed futures, real estate, commodities, and derivatives contracts. Key alternative investment strategies involve taking long or short positions in assets based on views around their future price movements. For example, a long-short equity hedge fund might buy undervalued stocks they think will rise while shorting overvalued stocks they think will fall. A global macro hedge fund might go long or short currencies, bonds, commodities and equity index futures based on top-down views on economies and markets.
What are the potential benefits and risks of alternative investments?
The articles discuss several potential benefits of alternative investments like wider diversification, reduced portfolio volatility, higher risk-adjusted returns, low correlation to traditional asset classes, and access to exclusive opportunities not available in public markets. However, they also highlight substantial risks around illiquidity, complexity, lack of transparency, speculative leverage, regulatory uncertainty and high fees. There is also typically less reliable historical return data available to analyze.
What alternative investments questions should investors ask before allocating money?
The articles emphasize key questions investors should get clear answers on from alternative investment managers before allocating any money. These include understanding the investment strategy and philosophy, assessing the manager’s background and track record, reviewing fee structures and incentives, understanding liquidity terms and risks, evaluating risk management practices, and checking regulatory oversight and compliance procedures. Doing thorough due diligence is essential.
How much of a portfolio can be allocated to alternative investments?
The articles note allocation recommendations for alternative investments range widely in the investment community from 5% to over 50% based on an investor’s specific profile, objectives and risk tolerance. Conservative long-term investors may allocate 5-15% whereas more aggressive short-term traders might allocate over 50%. Most institutional investors have 10-30% in alternatives. Position sizing based on volatility and risk exposure not just notional allocation percentages is also important.
In conclusion, while alternative investments can provide portfolio diversification benefits, they also involve substantial complexity, illiquidity and due diligence requirements for investors. Key questions around risks, incentives and transparency need to be addressed. Allocation percentages depend significantly on an investor’s specific return objectives, liquidity needs and risk tolerances over their given time horizon.