Capital
Alternative Investments
Broadly speaking, alternatives are investments in assets other than stocks, bonds and cash — or investments using strategies that go beyond traditional methods, such as long/short or arbitrage strategies. Because alternatives tend to behave differently than typical stock and bond investments, adding them to a portfolio may provide broader diversification, reduce risk and enhance returns.
Hedge Funds
With their range of trading strategies and participation in non-traditional markets, hedge funds can provide a level of diversification to a portfolio that can be hard to find elsewhere.
- Broad opportunity set and fewer investment restrictions, with holdings that can be less correlated to public markets
- Trading strategies that seek out market inefficiencies, allowing highly skilled managers to add significant value over time
- Five main categories: Long/Short, Managed Futures, Global Macro, Distressed and Multi-Strategy
Private Equity
Investing in private companies offers the potential for enhanced diversification and returns, since the factors driving these markets differ from those that drive public equity markets.
- Private ownership enables long-term strategic focus versus the public market focus on quarterly earnings
- Returns on private equity investments have historically exhibited attractive performance on both a risk-adjusted and absolute basis
- Opportunities span every stage of a company’s life cycle — venture, growth, buyout and restructuring
Commodities
Historically, investment in natural resources — including agricultural products, energy, precious metals and industrial metals — comes with several benefits. Commodities rise and fall with supply and demand, and are not sensitive to public equity market movements, offering a natural protection against inflation.
- Index funds that track a basket of commodity assets
- “True” commodity funds that invest directly in the underlying asset (e.g., gold or oil)
- Futures-based commodity funds that gain exposure through futures contracts
Real Estate
Real estate is another popular and flexible strategy for portfolio diversification. Publicly traded ETFs and trusts allow investors low barriers for real estate investing strategies.
- Real estate can be a good source of diversification, less correlated to stock, bond and cash returns over the long term
- Strong generator of immediate cash flow with potential for capital gains
- REITs combine the potential of increasing real estate value with the transparency and liquidity of publicly traded stocks
How Alternatives Work
Alternative investments are often met with misunderstanding. Some investors still think of alternatives as high-risk, exotic funds reserved for ultra-high-net-worth individuals and institutions. The reality is that alternatives can be an integral part of nearly every investor’s portfolio.