When building a long-term investment strategy, diversification is key. While traditional investments like stocks and bonds often form the foundation of a portfolio, many investors also consider alternative investments as a way to broaden exposure and manage risk in a changing market environment.
What Are Alternative Investments?
Alternative investments generally refer to assets outside of traditional equity and fixed income markets. Common types include:
| Private equity | Investments in private companies or buyouts of public companies, aiming for long-term capital growth. |
| Real estate | Investments in residential, commercial, or industrial properties that may offer income and diversification. |
| Hedge funds | Pooled funds using a range of strategies to seek returns, often with reduced correlation to traditional markets. |
| Commodities | Investments in physical assets like gold, oil, or agriculture, often used to diversify portfolios and hedge inflation. |
| Infrastructure | Investments in essential assets such as transportation, utilities, and communication systems, often with long-term return potential. |
| Structured products | Pre-packaged investments that may include derivatives, offering tailored risk-return profiles. |
| Private credit | Direct lending to businesses, typically outside of traditional banks, often aiming to generate income. |
These investments often have different return drivers, liquidity profiles, and risk characteristics compared to stocks and bonds.
Why Consider Alternatives?
The primary appeal of alternatives lies in diversification. Because many alternatives behave differently from public markets, they may help reduce overall portfolio volatility or add different sources of return. For example:
- Real estate may offer income and inflation sensitivity.
- Commodities tend to perform differently during periods of economic stress or inflation.
- Private credit or private equity may offer access to opportunities not available in public markets.
That said, the role of alternatives is not about chasing higher returns, it’s about broadening the risk/return profile of a portfolio in a thoughtful, measured way.
Considerations Before Investing
Alternative investments are not one-size-fits-all. They tend to come with trade-offs, including:
- Lower liquidity – Many alternatives have longer lock-up periods or limited redemption options.
- Higher complexity – The strategies, structures, and risks can be more difficult to understand and evaluate.
- Cost structure – Alternatives may involve higher fees than traditional investments.
Because of these differences, it’s important to carefully assess how alternatives align with an investor’s time horizon, risk tolerance, and overall goals.
How Alternatives Fit in a Portfolio
For some investors, a small allocation to alternatives, often in the range of 5–20%, depending on the strategy and risk profile, can complement a core portfolio. The objective isn’t to replace traditional holdings, but to help enhance diversification and introduce new sources of potential return. The specific role of alternatives will depend on the investor’s situation.
Alternative investments can serve a valuable purpose in a diversified portfolio, but they require thoughtful evaluation and professional guidance. They’re not about quick wins or guarantees. Instead, they help offer a broader palette of tools to assist investors navigate complex markets.
As always, the right investment strategy depends on your individual goals, risk profile, and timeline. If you’re considering alternatives, let’s talk through how they may (or may not) fit into your broader financial plan.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
