More and more investors are shifting their attention to alternative investments. In fact, in 2021, Robert A Stranger & Co. Inc stated that sales of alternative assets reached $31.6bn (£23.7bn) globally.
Alternative assets are non-traditional assets meaning that they do not belong under the categories of bonds, stocks and cash investments. This means that they can assist in effective portfolio diversification and risk management.
Types of alternative assets examples include:
- private markets funds such as venture or private equity,,
- hedge funds,
- commodities such as grain and metals,
- tangibles such as luxury cars or fine wine
- and infrastructure.
Alternative assets have been fantastic source of returns historically. Let’s discuss the benefits of investing in one.
Source: https://www.preqin.com/academy/lesson-1-alternative-assets/why-invest-in-alternatives
Diversification
One of the most important factors in seeking alternative assets is portfolio diversification.
Alternative assets are less correlated to traditional assets, meaning that they can play an important role in portfolio diversification and in improving risk-adjusted returns. For example, assets such as fine wine or classic cars are types of alternative asset classes with low correlation to traditional assets such as equities. These are tangible assets which are worth considering adding to an investor’s portfolio.
Alternative assets often don’t move in the same direction as traditional assets or to the same extent when the market changes. If stocks and bonds are not performing well, that doesn’t mean that alternative assets are also suffering, or certainly not to the same extent. For instance, during 2008, the Liv-ex declined by just 12.4% compared to the S&P 500 which fell by 38.5% during that year alone.
Better volatility management
Some alternative assets can be highly volatile but as a group, they may not be more volatile than other investments. Alternative assets are often less volatile than traditional assets.
Particularly, the stock market has been seeing heavier volatility since October 2021. But that volatility has not translated into volatility for most alternatives.
Better risk management
Alternative assets give you access to a wider range of assets which not only help you diversify your portfolio but also spread the risk. You reduce portfolio risk when your portfolio correlates less with traditional assets.
Investing in alternative assets as well as traditional ones could be a good strategy as the aim is to diversify your portfolio and avoid overreliance on one asset class only. This helps manage portfolio risk more effectively and protect the value of your portfolio from the fluctuations of the market.
Hedge against inflation
Currently, in 2022, inflation is prominent globally with inflation predicted to rise above 10% in the UK.
However, inflation can sometimes be positive for alternative asset investors. This is because high inflation rates increase the replacement cost of real alternative assets which consequently increases the value of the asset itself.
In other words, inflation can work in an investor’s favour when they diversify their investment portfolio with alternative assets.
Enjoyment
Many investors see the process of investing as a passion. They invest in assets that are close to their values and have a passion for.
Specifically, a study (p.20) from Lloyds Banking Group shows that one in six investors viewed alternative investing as a hobby.
Investing in alternative assets, although it could generate risk-adjusted returns, is not necessarily only for profit but for enjoyment.
AssetTribe brings you closer to your ‘why’.
AssetTribe is a community-led platform that aims to bring you closer to alternative assets.
We help professional investors engage with real-world assets that are tailored to your values and your aspirations.
