An alternative investment is an investment in asset classes other than stocks, bonds, and cash. The term includes financial assets such as real estate, commodities, private equity, life settlements, energy, distressed securities, hedge funds and venture capital. Despite unique risks and considerations, alternative investments can be useful tools to improve the risk-return characteristics of an investment portfolio. They can increase diversification and reduce volatility, given low correlations to more traditional investments; they can offer the potential for enhanced returns due to the wider investment opportunity set; and they can hedge certain portfolio exposures, thereby reducing concentration risk.
Given the potential benefits of alternative investments we find it interesting that the typical individual investor has little to no exposure to alternatives. Whereas large institutions have a significant portion of their portfolios allocated to alternatives. One reason for this may be that while many investors will acknowledge that they are worried about losing money due to market volatility they are still unwilling to consider alternative investments even though their portfolios might benefit from their inclusion.
The question then becomes why are investors unwilling to include alternatives in their portfolios. Is it because they do not fully understand the benefits, risks, costs and liquidity of the opportunities? While the answer is different for every investor, the principals of Irvine Advisors can help you determine if alternative investments are right for you.