Because of chronically low bond yields, extreme central bank intervention, and the threat of over-heated stock valuations, the most sophisticated investors in the world are allocating more of their assets to Alternative Investments.
They believe that Alternative Investments will give them a better chance of achieving sufficiently high returns to meet future obligations while protecting against excessive downside.
Generally speaking, Alternative Investments are any asset class that is not among the three traditional asset types (stocks, bonds and cash) and are used, among other objectives, to more fully diversify a portfolio.
Alternative Assets | Other Alt Investments | Alternative Strategies |
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Alternative Investments permit more efficient portfolio construction with the potential to deliver on a range of desired outcomes:
Theoretical example of using offsetting asset class correlations to reduce portfolio risk
Several factors are driving interest for Alternative Investments among sophisticated investors:
Monthly Rolling Correlation of S&P 500 vs 10-Year US Government Bonds
As correlation becomes positive, the traditional 60/40 stocks-bonds portfolio no longer provides the same diversification
While the definition of Alternative Investments has broadened, “Alts” still suffer from the perception of being high-stakes, high-torque hedge funds.
Today’s hedge funds are more focused on risk management and the broader set of Alternative Investments to which they belong are designed to provide stability to a portfolio through better diversification.
That said, for retail investors interested in Alternative Investments, there are some important considerations:
Alternative Investments | Accredited Investors | Mutual Funds | ETFs |
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Real Estate |
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Infrastructure |
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Commodities |
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Private Debt |
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Private Equity |
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Marketable Securities |
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When well managed, Alternatives have the potential to complement core equity and fixed income allocations by improving diversification, managing risk, providing income, and enhancing returns.
A professional asset allocator can help determine if Alternative Investments will help a portfolio achieve its investment goals.