Over the past few years, there has been an increased interest in alternative assets among investors. With modern portfolio theory (MPT) suggesting that including a number of asset classes can result in improved risk-adjusted returns, it’s no wonder that more and more wealth managers and investment advisors are turning to alternative assets to help their clients reach their financial goals. But what exactly are alternative assets?
What are Alternative Assets?
Alternative assets are defined as any asset that is not a traditional asset class, such as stocks, bonds, or cash. This includes assets that are not well represented in standard portfolios, such as private equity, venture capital, hedge funds, real estate, infrastructure, commodities, and collectibles.
The main advantage of investing in alternative assets is that they tend to be uncorrelated with traditional investments like stocks and bonds. This means that when stock prices are falling, the prices of alternative assets may be rising. This provides investors with the potential to mitigate losses and realize gains.
The Case for Alternative Assets:
The primary benefit of investing in alternative assets is diversification. By adding alternative assets to a portfolio, investors can reduce overall portfolio risk without sacrificing potential returns. Additionally, as previously mentioned, alternative assets tend to be less correlated with traditional asset classes like stocks and bonds, providing a valuable hedging tool in uncertain times.
Secondly, alternative assets have historically outperformed traditional assets. For example stocks have averaged annual returns of 7-10%. Whereas alternative assets have generated average annual returns of 12% over 20 years and closer to 14% in the last five years. That may not seem like a huge difference, but over time it can compound to produce significant results.
This in turn has meant that demand for alternative investments are on the rise. A recent survey by Preqin found that 60% of institutional investors plan to increase their allocations to alternatives in the next five years.
However, not all alternative assets are suitable for every investors. For example, private equity and venture capital typically require a long time horizon and a high tolerance for risk. As such, they may not be suitable for older investors or those with more conservative risk profiles.
In addition, there has always been a financial barrier to entry as many alternatives funds require a minimum investment of $1 million or more. This is an amount that few individual investors could afford to lose. However, by investing through an alternative asset platform such as AssetTribe and via feeder funds, individual investors can gain exposure to a number of different funds with smaller investment amounts. The advantage of alternative asset platforms and feeder funds is that they often provide access to investments that would be otherwise unavailable to individual investors.
Wealth managers and investment advisors face a challenging landscape today. With recession on the horizon and bond and equity markets struggling, many are searching for ways to protect their clients’ portfolios from volatility. A viable solution gaining popularity is alternative assets and investment funds. Alternative assets can provide diversification and hedging benefits in uncertain times. However, not all types of alternative assets will be suitable for all investors.
It’s important to carefully consider your client’s goals, risk tolerance, time horizon, and other factors before recommending any type of investment. Feeder funds and alternative asset investment platforms can offer another way to access alternative investments. When used thoughtfully alongside traditional investments like stocks and bonds, alternative assets and alternative investment funds can help you build a well-rounded portfolio that can weather any storm.
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