Adding alternative investments to your portfolio can be part of your strategic asset allocation as
they can improve the return of the portfolio since they differ from the traditional stock and bond
investments and they are not bound to the same constraints of the more traditional investments.
A list of traditional alternative investments includes real estate, private equity, commodities,
hedge funds, managed futures, and distressed securities. 10% to 20% is appropriate to allocate to
alternative investments but it really depends on the risk you are willing to digest. Some common
features of alternative investments that investors should be aware of include illiquidity,
diversifying potential, higher costs due to more complex strategies and difficult performance
appraisal due to the complexity of valid benchmarks.
Since they do not behave the same way as the market, the most significant benefit is
diversification. These assets provide a low correlation to the stock market and can help investors
hedge against inflation. They provide a broader diversification which aids in mitigating
volatility within a portfolio. Given the broad range, however, it is very important for an investor
to dot their due diligence and know the market for the investment, benchmarks, and historical
data, strategy as well as any issue in performance reporting prior to adding them to their
investment portfolio.
Just as there are benefits, these non-traditional investments come with unique risks that should be
taken into consideration before allocating to a portfolio. The top risks to consider are higher
fees, more complex strategies, less transparency, and less liquidity. Some investors might find it
is worth to take on the additional risk as alternative investments can improve the return of an
investment portfolio, increase diversification and possible reduction in volatility when compared
to traditional investments.
