Investment Themes : Alternative Investing

Once reserved as an investment tool for pensions and endowments to manage risk, individual investors now have a variety of options when it comes to allocating alts in their portfolios.

Pronounced market turbulence in recent years (particularly the volatile market in later 2008 and 2009 and the bear market 2000 to 2002) has led investors to look for different investment options that help mitigate risk in volatile market conditions.

Alternative asset strategies and asset classes are becoming available in the form of mutual funds and exchange traded funds (ETFs), thereby providing individual investors greater access.

When investing, it is important to have realistic expectations. It is tempting to think alternatives will guarantee enhanced results, but this is not necessarily the case.

As with any investment, there is the potential for up and down days. Additionally, there is no guarantee that diversifying a portfolio with alternatives will mitigate the risk of experiencing investment loss or assume a profit.

Diversification in a Portfolio

If you're investing in asset classes that perform similarly-especially in downward-moving markets-the answer could be no. That's because traditional portfolios are typically comprised of only stocks, bonds and cash. While stocks and bonds may provide some diversification, there are other investment opportunities that could provide even more.

Weighing Risk vs. Reward

The traditional Efficient Frontier asset mix may not offer sufficient diversification or risk management. One possible solution may be the addition of asset classes that have little or no correlation to equities or fixed income-that is, their movement is not tied to either equities or bonds. While many investors have more access to and knowledge of a wide range of alternative investments, it's still important for them to be aware of both their risks and returns.

Potential Benefits

Despite the unique aspects of various types of alternative investments, many do share some common potential benefits:

  • Many provide improved diversification (i.e. non-, low or moderate correlation) when added to a traditional portfolio consisting of stocks and bonds
  • Alternative investments may provide the opportunity for enhanced returns when added to a traditional portfolio
  • The addition of alternative investments to a traditional portfolio may decrease risk of the overall portfolio

Alternative ETFs From Claymore

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