alternative assets

Outside of the financial investment community, the paraphrase alternative investments or ‘alternatives’ would have little meaning for most people. So much so that even within the financial investment community, not everyone would be aware of this new tool in the hands of fund managers. With a meteoric rise in the number of investment opportunities and vehicles, more and more investors including high net worth individuals are realizing the importance of this class of investments and its ability to diversify and reduce the risk of most portfolios. As the information gap narrows and the level of investor sophistication increases, there are more opportunities available today for sophisticated investors.

The financial investment community has already started embracing alternatives in a major way. Over the past five years, alternative assets have been the fastest growing asset class with an average portfolio allocation today of five to seven percent. Generally speaking, endowments and foundations have the largest allocations with some investing more than 20% of their portfolio in alternatives.

The primary benefit that alternative investing offers to an otherwise traditional portfolio of financial assets is diversification. Many alternative investment strategies have extremely low correlations to price movements in more traditional financial securities. Maintaining a portion of a portfolio in assets whose returns are somewhat independent of the financial markets can be enticing from a risk control standpoint, especially when financial markets become overvalued. While the opportunity for high returns might exist within the alternative investments arena, the primary reason to consider alternatives is for diversification and risk control.