Why Alternative Investing? Benefits and Strategies for Diversification

In today’s fast-changing investment world, smart investors are looking at alternative assets to boost their portfolios. These assets include real estate, private equity, hedge funds, commodities, and venture capital. They can add variety to your investments, possibly bring in higher returns, and open up new market areas. As the market for alternative investments could hit $14 trillion by 2023¹, they’re becoming easier for more people to get into, even for those who aren’t pros.

Diversifying your portfolio is key to managing risk and aiming for better returns. It means spreading your money across different types of investments. Alternative assets can help a lot here because they don’t move in the same way as stocks and bonds. This means they can help lower the ups and downs in your portfolio and possibly improve your returns¹. If you’re looking for big gains or want to keep your portfolio stable, alternative investing might be worth a look.

Alternative investments can offer higher returns than traditional ones¹, making them appealing for those wanting to boost their portfolio’s performance. Also, more people are seeing private equity in 401(k)s¹ and investment firms are making it easier to get into mutual funds focused on alternatives¹. This shows a move towards more varied investment choices for everyone.

Whether you’re new to investing or have been doing it for a while, looking into alternative investing can be a smart move. It can help make your investment portfolio stronger and more varied. In the next parts, we’ll dive deeper into alternative investments, their role in today’s portfolios, the different types of assets, and how easier it’s getting for investors to join in.

Understanding Alternative Investments in Modern Portfolios

Alternative investments are now open to more people, not just big investors². These include private equity, hedge funds, real estate, and commodities. They offer a chance for better returns and diversification compared to stocks and bonds².

Types of Alternative Investment Assets

The alternative investment market is wide and varied. Each asset class has its own features and needs. The Cambridge Associates Private Equity Index tracks different private equity strategies³.

Evolution from Institutional to Retail Investing

Once only for big investors, alternative investments are now more accessible². Open-end and closed-end funds give retail investors a chance to invest in specialized areas².

Market Accessibility and Requirements

The rules for investing in alternative assets vary. Some, like private equity and hedge funds, need more money and special status². Others, like REITs or commodity funds, are easier to get into². It’s important to think about how liquid they are, their fees, and who watches over them².

Both big and small investors see the value in alternative investments³. They help diversify portfolios, aiming for better returns and less risk³.

“The alternative investment market in Latin America is growing due to the need for resilient portfolios amid record low bond yields and high equity market volatility.”³

Why Alternative Investing: Core Benefits for Investors

Alternative investments bring many benefits for those looking to diversify their portfolios. They offer the chance for portfolio diversification. This means they often don’t move in the same way as stocks and bonds, helping to lower risk⁴. This diversification can protect against market downturns and offer chances for gains even when traditional markets do poorly⁴.

Also, alternative investments can give higher returns than traditional ones. This is because of the illiquidity premium, which rewards investors for the lack of quick sale options⁴. Some, like real estate and early-stage companies, also come with tax benefits like depreciation deductions or tax incentives⁴.

Moreover, alternative investments tap into less efficient market segments. This lets investors grab growth chances not seen in public markets⁴. This includes private equity, venture capital, or alternative credit, which look for promising companies or market gaps⁵.

However, alternative investments come with their own set of risks. These include company-specific issues, local market conditions, or startup failure⁴. But, with proper research and a well-thought-out portfolio, these risks can be managed. This way, investors can boost their risk-adjusted returns and create a stronger portfolio⁴.

Portfolio Risk Management Through Alternative Assets

Alternative investments are key in managing portfolio risks. They often don’t move with traditional investments like stocks and bonds. This helps lower overall risk. Diversifying with alternative investments can make your risk profile smoother and might increase long-term gains⁶.

Correlation Benefits with Traditional Assets

Correlation is vital for diversifying your portfolio. Assets that move in opposite directions (negatively correlated) help reduce risk⁶. Investments like real estate, commodities, and hedge funds have lower correlations with traditional assets. This provides a shield against market ups and downs⁶.

Volatility Reduction Strategies

Strategies like long-short equity, market neutral, and managed futures can lower portfolio volatility. These methods aim to make money regardless of market trends. They help balance out the highs and lows seen in traditional investments⁶⁷.

Hedging Against Market Downturns

When the stock market is shaky, assets like real estate or commodities can act as a hedge. They move differently, protecting against market volatility⁶. The higher volatility in private equity and real estate returns highlights their value in a diversified portfolio⁷.

Adding alternative investments can enhance your portfolio’s risk and return profile. It opens up a wider range of investment options and strategies⁶.

“Diversification is the only free lunch in investing.” – Harry Markowitz, Nobel Laureate in Economics

Strategic Implementation of Alternative Investments

Adding alternative investments to a portfolio needs a solid plan. Financial advisors must know a lot about different types of investments. They also need to check the managers and strategies carefully⁸.

It’s wise to start small and grow the investment slowly. This lets advisors keep an eye on how it’s doing. It also gives clients time to get used to these new investments⁸.

Advisors should think about how easy it is to sell these investments. Some, like hedge funds, might be harder to sell⁸. But, they could still do well in the future⁸.

Private credit markets are also getting busier. This could lead to better deals in 2024⁸.

But, private equity might find it tough with high interest rates. This is because they borrow a lot and their values were set when rates were lower⁸.

Real estate trusts are also facing challenges. This is because of high interest rates and what the Federal Reserve might do⁸.

Advisors need to watch their clients’ investments closely. They should make sure the risks are managed well⁹. For example, equity strategies should not be too big or too small⁹.

By planning carefully and keeping an eye on risks, advisors can help clients. They can make sure their portfolios are strong and varied⁸⁹.

“Successful alternative investment implementation requires a delicate balance of due diligence, risk management, and client education.”

Conclusion: Building a Resilient Investment Portfolio

Investment options are always changing. Adding alternative investments to your portfolio can make it more diverse. This might lead to better returns and help manage risks¹⁰. But, it’s important to understand that these investments come with their own set of challenges.

A mix of traditional and alternative investments can make your portfolio stronger over time¹¹. BlackRock’s alternatives platform manages £326 billion as of June 30, 2024. It offers strategies in private equity, real estate, infrastructure, and hedge funds. These are designed to help you achieve consistent growth and manage risk.

Choosing a balanced approach to building your portfolio can improve its performance¹¹. BlackRock’s team uses both numbers and in-depth analysis to manage risks. They help clients achieve their long-term goals by offering tailored solutions.