Your investment portfolio typically includes conventional investments such as equities and bonds, both of which are equally important components of a solid, long-term investment strategy. But there are many other less typical investments that complement your portfolio and give you the opportunity to reduce some of the effects of market volatility. Consider alternative investments such as commodities, hedge funds, mutual funds with alternative strategies and futures to complete your portfolio.
What are alternative investments?
Alternative investments are asset classes that are usually not linked to traditional equity and bond markets. They usually follow their own cycles. As a result, alternative asset classes have a low correlation with standard asset classes and can help diversify your portfolio by reducing the overall volatility of the portfolio when traditional asset classes such as equities and bonds perform poorly.
Historically, alternative investments have been limited to high net worth individuals and institutional investors, but today they are much more readily available to a wider audience. Alternative investments range from real estate to hedge funds to commodities and can complement a variety of investment strategies. However, they are designed to complement a well-founded portfolio rather than serve as a focus of the portfolio.
Most people are attracted to alternative investments because they can achieve higher returns than traditional investments but note that potentially higher returns can also entail higher risks. It is important to note that alternative investments may be more illiquid than their conventional counterparts – they are not easy to sell like stocks and bonds – and some may need to be held over time. In addition, there may be one-time fees or tax consequences.
Alternative investment opportunities for your portfolio
There are many investment products today, and it can sometimes be difficult to clearly identify which investments are conventional or alternative. Below is a list of common alternative investments with their potential benefits and risks.
Including a small portion of your portfolio in precious metals such as gold or silver can offset the performance of other assets in the portfolio such as equities and bonds, as precious metals typically do not move in line with traditional investments.
Gold is typically seen as a hedge against inflation and currency fluctuations. So when inflation affects the purchasing power of a currency – let’s say the dollar weakens against the euro – gold prices tend to rise. As a result, investors place their money in gold during economic and market weakness.
Investing in gold can be done in a variety of ways, including futures funds, exchange-traded funds, mutual funds, bars and coins. However, because precious metals are a small sector, prices often change dramatically. This type of volatility can create opportunities for investors in the form of high returns, but can also lead to dramatic losses.
Hedge Fund Offers
In the past, hedge funds were only available to wealthy individuals and institutions. Hedge funds are investment pools that manage money for institutions such as banks, insurance companies and individuals who meet the nationwide definition of a “qualified buyer” in terms of assets and income.
Hedge funds are generally organised as limited partnerships in which the fund managers are the general partner and the investors the limited partner. Hedge fund investments generally have limited liquidity as planned, so that these alternative investments are subject to special regulatory requirements that differ from investment funds.
Funds of hedge funds invest in a variety of hedge funds with many different strategies and asset classes with the aim of reducing the fund’s overall risk through increased diversification. Fund of Hedge Funds are available to investors who meet the accredited net assets of at least US$1 million. Hedge fund fees are higher due to the nature of portfolio management and increased trading costs.
Fund of Hedge Funds are registered with the SEC under the Investment Company Act of 1940 and as securities under the Securities Act of 1933. They may also take the form of a private offer that must comply with more stringent, accredited investor standards. Fund of hedge funds can be complicated investment vehicles that often rely on leverage, have little transparency, restrictions, etc.