Alternative investments have long been misunderstood in the world of investing. Now that they are becoming more and more mainstream, they are almost even more difficult to understand. Fortunately, there are a lot of things alternatives can do for you and your portfolio.
How Alternatives Work
Let’s demystify this a little bit. Alternative investments differ from traditional investments in that investors can put their money in new and different areas, providing them with a way to improve the risk-return of their portfolio.
The approach to alternative investments is a little different. Alternative investments involve a lot more diversity, from holding private securities, as well as long and short securities, rather than publicly traded investments. Alternatives also involve strategizing around hedging toward the objective of a pre-defined level of absolute return, distinct from the traditional relative performance or index.
Alternative Investments: The Risks
When it comes to alternative investments, it’s important to do your research before jumping in headfirst. The risks are unique. For example, when it comes to the distribution of investment return, alternative investments tend to involve a much higher level of both positive and negative outliers than their traditional counterparts.
Alternative investments often have higher fees than traditional investments and present many more complications. As such, they require consistent, diligent research on the part of the investor due to the much wider range of investments. There is also, as with any investment, a potential that they will not pull through in the way that you expect them to.
The Flipside: The Benefits of Investing in Alternatives
This is because alternative investments are an excellent way to diversify your portfolio as well as reduce the overall volatility of your already existing investments. As such, by investing in alternatives, you will find that your potential for enhanced returns can quickly and visibly increase.
Consider the return on an investment that you are striving for. Alternative investments actually have a much higher potential for better performance than traditional investments, due to the wider range of public and private assets to invest in. Additionally, alternative investments do not hold the same constraints as conventional ones.
Alternatives can actually decrease the overall portfolio risk for investors. This is because alternatives can hedge exposure to, for example, greater consequences when it comes to taxes on selling an asset with low cost basis or other limitations.
Even with the risks involved with alternative investments, from higher fees to much greater complexity and liquidity of such investments, it is definitely important to remember that these kinds of investments can and do pay off.