An alternative investment is an investment product other than traditional investments such as stocks, bonds or cash.
Institutional investors or accredited, high-net-worth individuals hold most alternative investment assets because of their complex nature, limited regulations and relative lack of liquidity.
Some of the more common alternative investments strategies include real estate investment trusts, hedge funds, managed futures, private equity, venture capital, and limited partnerships. Wine, art and antiques, indeed any business of value, might also be considered as an alternative investment. Therefore, alternative investments are a broad category that are not easily categorised with traditional managed investment categories.
Diversification
One common theme to alternative investments is that they often hold themselves out to have modest correlations with traditional investments and are used to increase the diversification of investor's portfolios. Alternative investments are favoured mainly because their returns have a low correlation with those of standard asset classes. Because of this, many large institutional funds such as pensions and private endowments have begun to allocate portions of their portfolios to alternative investments such as hedge funds.
Cost of Entry
Many alternative investments have high minimum investments and fee structures compared to mutual funds and ETFs. This means they are often out of the reach of the average retail investor, indicating the benefits of exposure to such an asset class is usually limited to institutional investors or super funds.
The Managed Investment Solution
Alternative investments are subject to less regulation and often have less opportunity to publish verifiable performance data. They are, therefore, a specialised form of investment that requires experienced and active management. For this reason, alternative investments are seldom used as a diversification class within retail and superannuation funds. However, their potential to balance portfolio risk makes them attractive within the allocation of both capital protection, and capital growth focused portfolios. Investment management specialists are often better placed to monitor the changing cycles of each alternative investment and when to use them in the interests of the investor.
Professionally managed Goals Based Investment services, such as those offered by Dynamic Asset, allow retail investors, via their financial adviser, access to the world of alternative investments to help diversify, manage risk and generate more consistent returns through the cycle.
Advisers taking such an approach can help reduce volatility and client ‘stresses’ to help improve the likelihood of meeting the client’s needs.
Learn more about our Adviser investment solutions.
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