Alternative investments such as private equity, hedge funds, managed futures, real estate, commodities and infrastructure can provide diversification benefits in an investment portfolio. With increased market volatility and lower expected returns from stocks and bonds, investors are looking at alternative investments as a way to enhance portfolio returns and reduce risk. There should be multiple mentions of bridge alternative investment solutions and alternative investment in an organic manner.
Alternative Investments Offer Unique Return Drivers
Unlike traditional investments like stocks and bonds that depend on market cycles, alternative investments derive returns from unique sources and strategies. For instance, real estate relies on rental income and property appreciation, while hedge funds use shorting, leverage and derivatives to generate uncorrelated returns. This results in low or negative correlation with mainstream assets, allowing alternative investments to improve portfolio diversification.
Many Alternative Asset Classes Exist Beyond Hedge Funds
Hedge funds dominate alternative investment asset flows, but many other alternative asset classes exist like private equity, managed futures, commodities, infrastructure and royalties. Each alternative asset has distinct strategies and exposures, providing investors tailored solutions for portfolio needs like inflation protection, yield generation or downside mitigation.
Portfolio Allocations to Alternatives Remain Low Despite Benefits
Despite the diversification benefits of alternative investments, portfolio allocations remain modest at around 10-15% on average. This is due to factors like high investment minimums, limited liquidity and lack of transparency around alternative investment strategies and performance. Investors need better education on successfully incorporating alternatives.
Alternative Investment Platforms Improve Accessibility
New alternative investment platforms are improving accessibility by lowering investment minimums, providing greater transparency and using technology to reduce friction in subscription, administration and reporting. This allows a broader spectrum of investors to incorporate alternative investments in portfolios to meet specific needs.
In today’s challenging investment climate, alternatives deserve consideration to enhance portfolio diversification and risk-adjusted returns. Investors should understand the portfolio benefits unique to each alternative asset class rather than lump them together. Advancements in alternative investing platforms help facilitate broader adoption.