Benefits of Having Alternative Investments In Your Portfolio

By Sang H. Lee , CrowdFunding Beat Guest Contributor,

As an investor, why should alternative investment opportunities excite you? First, it’s important that we define what we mean by an alternative investment. Dr. Christopher Geczy, Professor of Finance at Wharton, explains in an interview with Blackrock that alternatives consist of all investments other than the traditional long-only equity or long-only bond investment. Investments that we would group in to this category consist of equity alternative strategies like long/short strategies used by many hedge funds, private equity investments, fixed income alternative investments (i.e. distressed debt), and investments in alternative assets (i.e. real estate or commodities).

There are several advantages to allocating capital to alternative investments. Many investors avoid putting capital into an investment perceived to be illiquid. This could be due to an investor’s particular liquidity needs and/or time-horizon. Why would your 85-year-old grandma invest in an asset with a 30 year exit opportunity? (Unless of course she’s passing it on for future generations.) So, because many alternative investments are illiquid compared to public equities or bonds, investors should and often are compensated for this with increased returns. This concept is known as a liquidity premium. The market will compensate the investor for the added illiquidity of the investment, as well as the added risk the investor must take due to this illiquidity. But let’s take a look at so-called liquid investments, because we all know that there are many pitfalls in that universe too.

In public equities an investor is subject to the volatility of short-term market behavior and biases. With alternative investments, an investor is not as vulnerable to short-term market views- the time horizon is a lot longer! A long term view in alternatives hedges inflation risk (as evidenced by investors fleeing into Gold in times of market volatility). Additionally, many alternatives have less correlation to the broad market. During the financial crisis, many investors assumed they had a diversified portfolio, but when the broad market fell so too did their savings. While it is generally positive to diversify stocks and bonds across industries, geographies, and market cap, the broad equity and bond market was heavily correlated to the general destruction of the U.S. economy at the time. An allocation of alternatives can hedge against market volatility.

The point is however, not to ditch all your stocks or bonds in favor of alternatives. What we are advocating is that it’s in an investor’s best interest to allocate part of their portfolio to certain non-traditional investments. With the introduction of digital investment platforms like DarcMatter, these types of opportunities are now available to individuals, not only the ultra-high net worth or institutional investor. Diversify your portfolio and protect yourself against market-volatility, while earning comparatively high risk-adjusted returns. We invite you to sign up for DarcMatter today to get updates on these opportunities.

SEE ALSO: 3 Benefits of Sourcing Alternative Investments on DarcMatter

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