You may know diversification is one way to weather periods of market uncertainty. During particularly volatile or low-yield times, your investment strategy may benefit from more complex investments with returns that are separate from equity or fixed income markets.
Alternative investments tend to move counter to stock and bond markets, which may make them an effective diversification tool.
Before diving into specific types of alternative investments, it’s important to know what distinguishes them as an investment.
A key distinguishing feature of alternative investments is they’re expected to generate an absolute return, independent of any benchmark.1
Additionally, they differ from traditional stock and bond investing in that they’re:
Types of alternative investments include hedge funds and private market investments.
Hedge funds are investments that use pooled funds with the goal of generating high potential returns for investors. Unlike mutual funds, hedge funds consist of assets beyond stocks and bonds. Because of the inherent risk associated with hedge funds, most are only appropriate for accredited/qualified investors, those who could withstand the total loss of value of their investment.
There are many different hedge fund strategies, and some come with more risks than others. Additionally, hedge funds aren’t tax-efficient investments, so investors should work with a financial professional to ensure the anticipated after-tax return is consistent with their financial goals.
Get more details on how hedge funds work to diversify your portfolio.
Consider private markets as the alternative investing counterpart of publicly traded stocks. Unlike stocks, however, when a business seeks private investors, only accredited/qualified individuals may invest.
Successful private market investments have historically shown the ability to outperform their public market proxies, whether it be bonds or equities.2 Investors may benefit from investing in private market funds whose investment teams are able to implement changes. Whether it be increasing revenues, cutting costs, or instituting changes among the executive decision-makers, these changes can equate to a higher valuation when the company is sold. A successful private market investor has the ability to spot funds that can turn around the fortunes of struggling companies.
There is the potential for some unique advantages for investors who successfully incorporate private markets into their portfolios, but there are also associated risks, including the full loss of the investment. In addition, private markets funds are considered an illiquid investment with no secondary market, so investors should be prepared to have their money tied up for at least 10 years.
Companies seeking private investors are not required to disclose as much information as publicly traded companies, so it’s important to conduct research in advance and partner with a knowledgeable financial professional.
Typically, seeking a worthwhile investment in this area requires familiarity with a given sector. You may want to consider tapping into a network of investors and advisors to help source solid private market opportunities.
Get more details on investing in private markets.
As with any investment, it’s important to consider individual alternative investments within the larger context of your portfolio strategy.
You may be looking to offset the risks you have in terms of stock and bond exposures. For example, if you have stock and bond investments, you might consider an alternative investment with a low correlation to the stock and bond market. This way, you’ll potentially gain access to a return stream less sensitive to market movement.
If you’re interested in entering the world of alternative investments, be sure to talk with a financial professional about which types can be an appropriate fit within your portfolio.
Read more about diversification strategies for your investment portfolio.