Are alternative investments right for you?

By Kristina Hooper, Chief Global Market Strategist, Invesco

Key Points

  • Alternative investments can help diversify your portfolio and potentially enhance yields and returns.
  • Alternatives include an array of assets such as private real estate and hedge funds.
  • An Ameriprise advisor can help you determine if alternative investments can further support your long-term investment strategy.

Many investors tend to think about asset classes in simple terms: stocks and bonds. Stocks provide long-term growth potential, while bonds add income and potential stability to help mitigate volatility in the market.

But this approach overlooks alternative investments, which can help diversify a portfolio and potentially enhance yields and returns.

In recent years, a significantly increasing number of institutional investors have added exposure to alternative asset classes. This is likely the result of:

  • Lower return expectations for traditional asset classes
  • A persistently low-interest-rate environment
  • Anticipation of higher market volatility

For the same reasons, individual investors may want to take a cue from institutional investors and explore alternative asset classes as a means to diversify their portfolio.

Alternative investments comprise a wide array of assets

Alternatives provide exposure to investments outside of traditional asset classes, which means they have the ability to provide diversification to a typical stock and bond portfolio. Some alternative asset classes also offer attractive yield potential, which may enhance the overall return in an investor’s portfolio.

In exchange for these potential benefits, alternatives may be more volatile, are generally illiquid and carry greater risks than traditional investments, which means they may not be suitable for all investors. That’s why it’s important to understand the different types of alternatives and whether they are right for you. Here are common types of alternative investments:

Private real estate is a “real asset” rather than a financial asset and includes non-listed commercial and residential real estate in the United States and globally. Real estate prices can fluctuate because of supply and demand and the overall health of the economy.

Hedge funds are investment pools that typically invest in a wide array of publicly-traded asset classes, such as stocks, bonds, currencies, commodities and derivatives. Most hedge funds employ some type of long-bias equity strategy, but there are also market-neutral hedge funds that hold both long and short positions in securities to potentially generate positive returns in all market environments. In doing so, they may help reduce portfolio volatility from market swings. Hedge funds typically are limited to institutional and high-net-worth investors, but there are several publicly available 40-Act mutual funds designed to mirror the performance of hedge funds.

Private equity and debt are investments in private companies (they are not publicly traded). These include venture capital (start-up companies), leveraged buyouts (established, formerly publicly traded companies taken private), as well as debt in privately held companies. Like hedge funds, private equity and debt investments usually are limited to institutional and high-net-worth investors.

Global macro strategies seek to capitalize on macroeconomic and geopolitical trends by investing in a wide variety of publicly-traded asset classes, such as stocks, bonds, currencies, commodities and derivatives. Because of their flexibility, global macro funds have the potential to achieve profits in both rising and falling market environments.

Work with an Ameriprise financial advisor to determine whether alternative investments are right for you. In general, this allocation should comprise a variety of alternative asset classes — all of which are available to most investors.