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Alternative investments: Thinking beyond the traditional asset classes

Discover the reasons investors diversify their portfolio with alternative investments.

Alternative investments, with unique strategies and structures, can offer different risk return patterns than traditional stocks, bonds and cash.

While alternative investments have been around for a long time – especially in institutional circles – they have only become more widely adopted in recent decades through the evolution of more private wealth-friendly investor structures.

Some alternative investments have the potential to enhance returns or income. Others provide investors with access to opportunities for strategies that aren’t available within traditional markets. Certain alternative investments can perform as an inflation hedge or help investors manage risk.

Investing in alternatives

Alternative investment strategies offer fundamentally a different approach and investor experience than that of publicly traded investments. While they can give you expanded exposure to the investable universe of stocks, bonds and real assets, this will come at reduced levels of liquidity. Examples of alternative investments include:

Private equity

Typically illiquid, private equity involves investments in private companies that aren’t publicly traded on the stock exchange. As companies remain private for longer or not go public at all, investors in private equity can benefit from private equity's active role in the operational improvement of those companies and their strategic commitment to long-term growth.

The longer-term investment horizon needed by private equity investors allows them the opportunity to diversify their assets and participate in the growth and innovation of private companies.

Hedge funds

An investment vehicle that employs a wide variety of specialized strategies to enhance return on income or mitigate risk. These often less-liquid strategies help investors diversity by capturing opportunities such as activist investing, trend following, event-driven or hedged-equity investing.

The flexibility of hedge funds to adapt to changing market conditions means that some strategies can thrive during periods of market dislocation where volatility tends to be higher, making them a good risk mitigator or diversifier.

Real estate and infrastructure

Alternative investments may also encompass residential, commercial or industrial real estate, or infrastructure projects like roads, bridges and airports. Real assets can also include a tax-advantaged yield component.

Alongside enhanced diversification from the ownership of tangible assets, real estate investors often have the potential to reap the benefits of long-term capital appreciation, as the value of real property or infrastructure assets increases over time. Often tied to contracted or regulated revenue, real assets can also provide a hedge against inflation.

Consult with your advisor

In spite of the potential benefits and diversification opportunities, each alternative investment also comes with its own risk, complexity and transparency issues. Not all alternative investments are suitable for every investor. It’s of utmost importance to keep your financial goals in focus when making investment-related decisions.

Talk to your financial advisor to explore whether alternative investments align with your financial objectives and risk profile. 

Sources: morningstar.com; jhinvestments.com; investopedia.com

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.

Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided.

Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

Prior to making an investment decision, please consult with your financial advisor about your individual situation.