Alternative investments make up an differing verticals of investment instruments, managed futures, real estate, commodities, hedge funds, private equity, along with a growing number of other types of (often exotic and mysterious) investments. Alternative investments have grown to be increasingly popular as well as a lot of press coverage in the recent past – not only because of stories about billionaire investment managers and traders, but additionally due to unique qualities and distinctive advantages alternative investments can bring to an investment portfolio:
- Diversity of assets and strategies
- Simple Inflation hedge
- Get exposure to non-stock market assets and opportunities
- Greater returns
Advantage 1: Diversity of assets and strategies.
With Alternative Investments the widely accepted belief that that hedge funds and private equity funds are incredibly high-risk investment strategies on a stand alone basis is justified to large degree. Nonetheless, once you think about these investments in the framework of total asset portfolio, many will find that many types of alternative assets possess wonderful diversification potential. Returns have shown low correlations to traditional asset classes like bonds and stocks and therefore adding alternative investments into a portfolio can help to eliminate volatility without sacrificing a part of return. Diversification is among the most powerful reasons why some kinds of institutional investors (including pension plans, endowments, or foundations) invest in alternative assets.
Advantage 2: Alternative Investments Simple Inflation hedge.
Some alternative asset classes are an excellent inflation hedge (their earnings are highly linked to inflation). Commercial infrastructure investments yield a low, yet secure long-term actual return. Private Equity Real Estate has shown to outperform inflation and in some areas, country GDP. Commodities are also believed to be a good inflation hedge, though you must be ready to accept much higher volatility with commodities.
Advantage 3: Get exposure to non-stock market assets and opportunities
Because alternative investments are extremely diverse, you’ve plenty of chances to discover new exposures, which are not accessible with traditional investments. Apart from stocks and bonds, you may invest in , infrastructure, commodities, real estate funds, or even venture type businesses.
Advantage 4:Greater returns. On Alternative Investments
Some kinds of alternative investments are very high-risk on a stand-alone basis; however, investors are rewarded for this risk by greater earnings. Like all additional above benefits, this kind of investment only applies to some types alternative investments (e.g. certain derivative hedge fund strategies or VC investments). Like those of traditional investments, earnings with alternative investments can fluctuate over time depending on marketplace conditions and overall economic cycle. Private Equity Real Estate funds outperform for a few reasons. The lifecycle is longer than traditional stock, with a 5 to 10 year timeframe allows investments to naturally drift upwards. Accumulated distributions can be recycled into yield enhancing activities like mortgage pay down, building upgrades, and even brand new building. Where as REITs are restricted from building and must distribute up to 97% of their cash. This slavery to the REIT distribution, can lead to shoddy and neglected building maintenance, low reserves, overtightening on overhead, and actually creates a “black box” effect where management has to hide or sneak cash into their pockets or into projects that would otherwise be disallowed like new construction.
Like all investments, research is needed to see what kind and type works best in an investment portfolio.