Alternative investments, or alts for short, are more available than ever and have only grown in popularity. But for someone just starting out, it’s hard to know where to begin choosing an alternative.
To begin understanding the world of alternatives, we must first break down return seekers and risk managers.
Essentially, alternatives are either one or the other and determining which one is for you is the first step.
Return seekers help boost performance by opening new opportunities for investments. Areas like private equity and venture capital as well as global infrastructure, like transportation and communication.
Risk managers offer something a little different by helping smooth performance out when markets get bumpy. Hedge fund strategies to improve returns, long or short equity to seek gains in unpredictable stock prices and merger arbitrage all fit into this category.
A well-curated blend of return seekers and risk managers to additional stock has been known to add a better balance of risk and return. But the selection of a mixture of both is not a one size-fits-all game. Performance changes over time; an alternative strategy that performed well one year may not perform well the next year. An example is private-equity doing well in 2012 through 2013 while managed futures lagged behind. But in 2014 they’ve completely traded places.
Chasing the right alternatives is only the beginning- if you can’t fit them into your portfolio then you’ve got nothing. A good rule of thumb is that individual strategies within an alternative should not move in the same direction as one another, other should keep up with changing patterns in the market in a cycle. Many financial advisors suggest that 10-20% of your overall portfolio should be alternatives.
Are you ready to get started with alternatives? Read through this infographic for more on how alternatives can bring diversification to your traditional stocks and bonds.