Assets

Alternative investments make your portfolio more robust

Q: Other alternative investments

Other important alternative investments are commodities such as precious metals, oil or coffee. Investors can now invest in almost all commodities via various investment vehicles. A typical investment for private investors, for example, is gold, because it offers protection against rising inflation due to its intrinsic value and helps diversify your portfolio.

Alternative investments are often part of a diversified portfolio and complement traditional assets like stocks and bonds. How to stay on track when you invest in alternative investments.

14 Oct 2021 4 min read

Hedge funds or private equity are two examples of alternative investments.

The Covid-19 pandemic is not only making itself felt in our private lives – the increased market volatility is also a challenge for investors. “Classic” diversification instruments, such as high-quality bonds, are also likely to suffer increased volatility with lower expected returns in the future. In a multi-asset class portfolio, adding alternative investments can bring various benefits to help you stay on track with your investment goals.

Alternative investments: diversify your portfolio

By adding strategies that are less dependent on a positive macroeconomic environment, women investors can build more robust portfolios. Alternative investments provide access to investment opportunities that reduce reliance on traditional market drivers and offer new potential returns. With a sufficiently long investment horizon, the risk-adjusted return expectations of a portfolio can be optimized.

Even with alternative investments, it is advisable to combine different strategies to ensure broad diversification and mitigate cluster risks. Read also “Lower investment risks via diversification”.

How do alternative investments differ from traditional investments?

As the name suggests, these are alternatives to traditional asset classes such as stocks, funds or bonds. Alternative investments often develop in the opposite direction to conventional investments, as they are far less influenced by interest rate developments and equity markets. Alternative investments usually require a longer investment horizon, as they are sometimes more illiquid or tie up capital for several years. Alternative investments include:

hedge funds, which can potentially benefit from both rising and falling prices, depending on the strategy
private equity – a form of investment where you invest directly in unlisted companies that have growth potential
commodities such as gold, oil or wheat
real estate, i.e., houses, apartments, as well as commercial and office space

The main alternative investments briefly explained

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Hedge funds

Hedge funds are actively managed investment funds that exploit opportunities in different asset classes. The goal of hedge funds is to generate returns regardless of the financial market situation, for example, even when markets are trending downwards or sideways. Compared to traditional investment funds, they sometimes use different instruments, such as short selling or options. Due to their complexity and the comparatively high investment volumes required, direct investments in hedge funds are only partially suitable for private investors. It is easier to access the asset class as part of the portfolio within an asset management mandate. Learn more about the peculiarities, opportunities and risks of hedge funds in our article “Diversifying your portfolio with hedge funds”.

Private Equity

Private equity is private investment capital in companies that are not listed on stock exchanges. The investments are generally made by professional investment companies which pool the investment capital of various investors. The invested capital is usually tied up for several years and therefore a longer-term commitment is required. Learn more about investing in private equity in our article “Investing in private equity”

Real estate

Investing in real estate gives you the opportunity to acquire and rent out real estate directly, thus generating a return. You can also invest indirectly in real estate through real estate funds, real estate ETFs and real estate investment trusts (REITs). Our article “Investing in real estate as an investor” explains how you as an investor can invest both directly and indirectly in real estate.

Other alternative investments

When are alternative investments suitable?

Alternative investments are a suitable means of further diversifying your portfolio and spreading risks, as some are less correlated with traditional asset classes. Since these types of investments are often less liquid, investors can also achieve an illiquidity premium.

Alternative investments are usually associated with higher risk and a higher capital investment, and are thus generally aimed at experienced, well-informed investors. However, they can still be a promising addition to your investment portfolio. As part of a portfolio of an asset management mandate, for example, they are also a relatively straightforward option for private investors.

Are alternative investments a good fit for your investment strategy and portfolio? We will be happy to help you answer this question in a meeting.

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