What are alternative investments?

Generally, the term can encompasses any non-traditional asset class. For example they may include but are not limited to private equity, venture capital, real estate, debt instruments, and hedge funds.

These are investments that do not trade publicly on any organized exchange and do not suffer from the daily market valuations that rise and fall with the market; rather they are distributed in the exempt marketplace to qualified investors and institutional investors. For this reason they are referred to as exempt securities.

Alternative investments are not a new asset class and they do not depend on the performance of equities which are tied to the stock market, or a portfolio of bonds which are tied to interest rates. This asset class typically comprises 20 - 40% of a smart investor’s portfolio and allows an them to stabilize their overall portfolio by lowering their volatility and creating steady returns. 

While many institutional investors allocate small single digit percentage of their assets to this class, some investors have been more aggressive and have achieved favorable returns from larger allocations to the alternative investment class.

Alternative investments have benefited high net worth investors and institutional investors for many decades, predating the public stock markets. These are companies and institutions such as Harvard, and Yale, or pension funds and large insurance companies.  Alternatives have benefited these groups with a reduction in volatility and an increase in overall returns, as they provide potentially less risk that the owning stocks, bonds, and particularly mutual funds.  There will also be diversification benefits resulting from low investment correlation with other holdings.

Today, these same strategies are being adopted by established individual investors who are seeing the same benefits as their high net worth and institutional investor counterparts.