What are alternative investments?
Alternative investments cover a wide range of investment opportunities. The major categories include private equity, absolute return (hedge) funds, infrastructure, emerging markets and commodities. It can also include more exotic investments such as art, film and gold.
Broadly an investment is considered alternative if it has a relatively limited investment history, is relatively uncommon in investment portfolios, has clearly differentiated features from any traditional asset class and requires specialist skills to manage. Private equity (venture capital) and absolute return funds are the most common investments available to high net worth investors in the Australian marketplace.
Why are they attractive?
There are a number of reasons why alternative investments are becoming more popular and are increasingly being seen as a fundamental part of the investment portfolios of high wealth clients. These include:
Additional diversification. Alternative assets have different features to traditional asset classes, producing returns with a low correlation with conventional shares, property and fixed interest assets. The level of correlation will depend on the specific type of alternative investment considered and the make-up of your existing portfolio. If well-chosen, however, the addition of alternative assets can increase your level of total portfolio return with no extra risk (volatility).
Potential for higher returns. The degree of uncertainty surrounding returns for alternative investments leads investors to demand a higher return than would normally be required from a comparable investment with a longer track record. Ultimately, the return will depend on the particular alternative asset chosen but they are generally regarded as a growth asset.
Asset protection in difficult markets. One of the features of alternative assets, in particular hedge funds, is that they can use a number of trading strategies including short-selling and derivatives to produce positive returns regardless of the direction of the market. These funds emphasise absolute returns and can trade in a number of different types of securities. These funds are highly dependent on the manager's skill.
Are alternative assets appropriate for my portfolio?
If your investment portfolio already contains traditional assets such as equities, bonds and property then alternative investments may provide additional benefits of diversification. To find out more on how the Global Diversified Fund can benefit your investments click here.