Are Alternative Investments for Me?


Where’s the Smart Money going?

Because of chronically low bond yields, extreme central bank intervention, and the threat of over-heated stock valuations, the most sophisticated investors in the world are allocating more of their assets to Alternative Investments.

They believe that Alternative Investments will give them a better chance of achieving sufficiently high returns to meet future obligations while protecting against excessive downside.

Figure 1 - CPPIB 2019 Allocation

What are Alternative Investments?

Generally speaking, Alternative Investments are any asset class that is not among the three traditional asset types (stocks, bonds and cash) and are used, among other objectives, to more fully diversify a portfolio.


Alternative Assets Other Alt Investments Alternative Strategies
  • Commodities
  • Real Estate
  • Infrastructure
  • Currencies
  • Private Debt/Credit
  • Private Equity
  • Multi-Strategy
  • Long/Short
  • Event-Driven
  • Market Neutral
  • Global Macro



The goal of Alternative Investments

Alternative Investments permit more efficient portfolio construction with the potential to deliver on a range of desired outcomes:

  • Portfolio diversification
  • New sources of income
  • Enhanced returns
  • Volatility & drawdown management
  • Interest rate risk management
  • Inflation risk management


Theoretical example of using offsetting asset class correlations to reduce portfolio risk

Theoretical example of using offsetting asset class correlations to reduce portfolio risk


Market factors driving interest in Alternatives 

Several factors are driving interest for Alternative Investments among sophisticated investors:

  • Higher correlations between traditional asset classes, exposing a portfolio to greater risk in a drawdown.
  • Low interest rates. Yields are low and income is hard to come by.
  • Creeping portfolio risk. As investors have sought to replace income in their portfolios due to falling government bond yields, substitutions have included longer duration bonds, high yield bonds, dividend paying equities, and preferred shares – all which may increase portfolio risk.
  • The age of the current market cycle.

Monthly Rolling Correlation of S&P 500 vs 10-Year US Government Bonds

As correlation becomes positive, the traditional 60/40 stocks-bonds portfolio no longer provides the same diversification

monthly rolling correlation of s&p500 vs 10-year us government bonds


Common risks and offsets for retail investors

While the definition of Alternative Investments has broadened, “Alts” still suffer from the perception of being high-stakes, high-torque hedge funds.

Today’s hedge funds are more focused on risk management and the broader set of Alternative Investments to which they belong are designed to provide stability to a portfolio through better diversification.

That said, for retail investors interested in Alternative Investments, there are some important considerations:

  • Access: In the past, investing in Alternatives required significant investment minimums. Today, a range of funds are available to give retail investors exposure to Alternative asset classes, with varying degrees of risk at more manageable levels.
  • Liquidity: Some Alternative Investments can tie your money up for more than a year. However some Alt funds are now being structured to provide 30 day liquidity, while Liquid Alts can provide daily liquidity. In any case, Alternatives are best viewed from a longer time horizon.
  • Transparency: Many Alternative Investments are privately traded, so there is limited information available on pricing, track records, and comparability (benchmarks). Good manager selection can help here, as can the visibility offered by Liquid Alt products.
Alternative Investments Accredited Investors Mutual Funds ETFs
Real Estate
  • Direct Investment
  • Private REITs
  • REIT Funds
  • Real Estate Sector Funds
  • Public REITs
  • Closed-End Funds
  • Direct Investment
  • Direct Investment Funds
  • Infrastructure Sector Funds
  • Infrastructure ETFs
  • Closed-End Funds
  • CTAs
  • Managed Futures
  • Direct Investment Funds
  • Resource-Focused Sector Funds
  • Precious Metals Funds
  • Resource ETFs
  • Precious Metals ETFs
Private Debt
  • Direct investment
  • Private Debt Funds
  • N/A
  • BDCs
Private Equity
  • Direct investment
  • Private Equity Funds
  • N/A
  • Listed Holding Companies
Marketable Securities
  • Traditional Hedge Fund
  • Liquid Alt Funds
  • Hedge Fund Indexed ETFs
  • Closed-End Funds

The role Alternative Investments can play in your portfolio

When well managed, Alternatives have the potential to complement core equity and fixed income allocations by improving diversification, managing risk, providing income, and enhancing returns.

A professional asset allocator can help determine if Alternative Investments will help a portfolio achieve its investment goals.

The role Alternative Investments can play in your portfolio


« Back
July 2020
The problem with the traditional 60/40 portfolio is that, in today’s markets, it has difficulty meeting its objectives — leaving investors exposed to…
November 2019
Portfolio managers and academics have worked over the years to build an investment framework that can be used to create the best risk-adjusted portfol…
November 2019
Alternative investments are less transparent than public equities or bonds, have few benchmarks, little or no secondary markets, and are relatively i…
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