What Are Alternative Investments?
What are ‘alternatives’ and how can they help to diversify a portfolio?
- Alternatives are assets outside of traditional categories like stocks, bonds, and cash
In investing, ‘alternatives’ refer to asset classes that are outside of traditional categories like stocks, bonds, and cash. These include private equity and venture capital, but also assets like precious metals, cryptocurrencies, derivatives, hedge funds, real estate or even wine and whiskey.
Because alternatives are typically less liquid than stocks and bonds they can be harder to buy and sell. However, alternatives have historically delivered higher returns than assets like public equities or bonds, particularly over longer investment horizons – though this is no guarantee of future returns.
Due to the nature of these non-traditional investments, alternatives are usually held by institutional investors or high-net-worth individuals who seek access to specific high-growth industries or niche areas of the economy (such as renewable energy or tech startups) that may not be available on public markets.
One of the main reasons for holding alternative assets is that they diversify a portfolio, especially when they sit outside of conventional financial markets. For example, some kinds of alternatives have low correlation with traditional investments like stocks (e.g. government bonds). As such, holding alternative assets alongside traditional investments can help protect a portfolio during economic downturns or stock market corrections.
“Due to the nature of these non-traditional investments, alternatives are usually held by institutional investors or high-net-worth individuals ”
Some alternative investments within ‘real asset’ classes, like land, gold and infrastructure, are often viewed as stores of value due to their tangible nature and as relatively stable stores of wealth, even in periods of economic uncertainty. This can provide capital preservation benefits for long-term investors, however, their value can still fluctuate based on economic and market conditions.
However, alternatives come with challenges (along with their illiquid nature), such as higher management fees, performance fees and minimum investment thresholds. Depending on asset type and region, they may also require specialized knowledge to manage and face changing regulatory scrutiny.
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