Are Alternative Investments for Me?

Alternatives May Contribute to More Efficient Portfolio Construction

Improvements in liquidity and transparency are making Alternative Investments increasingly accessible for retail investors.

Where’s the Smart Money Going?

Because of uncertain bond yields, extreme central bank intervention, and uncertainty in the stock markets, 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 cashflow obligations while protecting against excessive downside.

What are Alternative Investments?

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
Commodities Real Estate Infrastructure	Private Debt/Credit Private Equity	Long/Short Event-Driven Market Neutral Global Macro

The Goal of Alternative Investments

Alternative Investments permit more efficient portfolio construction with the potential to deliver on a range of desired outcomes:

Portfolio diversification
New sources of income
Enhanced returns
Volatility & drawdown management
Interest rate risk management
Inflation risk management

Diversifying with alternative asset classes may help smooth out the volatile returns of public market investments

This stylized diagram is for illustrative purposes only, and does not reflect suggest performance of any type.

Market Factors Driving Interest in Alternatives

Several factors are driving interest for Alternative Investments among sophisticated investors:

Higher correlations between traditional asset classes, exposing a portfolio to greater risk in a drawdown.
Uncertain interest rates. Yields remain historically low and income is harder to come by.
Creeping portfolio risk. As investors have sought to replace income in their portfolios due to falling government bond yields, substitutions have included longer duration bonds, high yield bonds, dividend paying equities, and preferred shares – all which may increase portfolio risk.
Uncertainty concerning the market cycle.

Monthly Rolling Correlation of S&P 500 vs 10-Year US Government Bonds

Source: Morningstar and St. Louis Fed (FRED), September 2022

Common Risks and Offsets for Retail Investors

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, while 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:

Access: In the past, investing in Alternatives required significant investment minimums. Today, a range of funds are available to give retail investors exposure to Alternative asset classes, with varying degrees of risk that a financial advisor can best assess.
Liquidity: Some Alternative Investments,such as Private Debt and Private Equity, are best-suited to investors who can support an allocation of less-liquid investments in their portfolios. That said, investors may want to explore Liquid Alts which provide many of the benefits of Alternatives, but offer daily liquidity.
Transparency: Many Alternative Investments are privately traded, so there is limited information available on pricing, track records, and comparability (benchmarks). Good manager selection can help here, as can the visibility offered by Liquid Alt products.

In all cases, please consult the applicable product offering documents for full disclosure of risk factors.

Alternative Investments	Accredited Investors	Mutual Funds	ETFs
Real Estate	Direct Investment Private REITs	REIT Funds Real Estate Sector Funds	Public REITs Closed-End Funds
Infrastructure	Direct Investment Direct Investment Funds	Infrastructure Sector Funds	Infrastructure ETFs Closed-End Funds
Commodities	CTAs Managed Futures Direct Investment Funds	Resource-Focused Sector Funds Precious Metals Funds	Resource ETFs Precious Metals ETFs
Private Debt	Direct investment Private Debt Funds	N/A	BDCs
Private Equity	Direct investment Private Equity Funds	N/A	Listed Holding Companies
Marketable Securities	Traditional Hedge Fund Strategies	Liquid Alt Funds	Hedge Fund Indexed ETFs Closed-End Funds

The role Alternative Investments can play in a portfolio

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.

The role Alternative Investments can play in your portfolio