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Why We Incorporate Alternative Investments and Strategies

Why We Incorporate Alternative Investments and Strategies

October 10, 2023

My clients can attest to the fact that I am a huge proponent for diversification. Much to the detriment of my compliance team’s workload (sorry gang), I simply love discussing and analyzing different ways of potentially improving risk adjusted returns.  For that reason, I believe it would be philosophically wrong for my first post to be about anything other than alternative investments and strategies. Let us explore WHY we consider straying, just a little bit, from the pure “stock and bond” allocations promoted by passive investment “only” institutions.

Including alternative investments and strategies in an investment portfolio can potentially offer several key benefits to investors, particularly if they are non-correlated with traditional stock and bond allocations. Here are some of the main advantages:

  1. Risk Diversification: Diversification is a fundamental principle of portfolio management. By including assets that have low or negative correlations with each other, investors can reduce the overall risk of the portfolio. When one asset class or market segment experiences a downturn, non-correlated assets are less likely to be affected in the same way, helping to mitigate losses.
  2. Lower Portfolio Volatility: Non-correlated assets can help smooth out the overall volatility of a portfolio. Since their performance isn't tightly linked to the movements of other assets, they can act as a stabilizing force during times of market turbulence. This can result in a more consistent and less stressful investment experience for the investor.
  3. Enhanced Risk-Return Profile: Adding non-correlated assets to a portfolio can improve the risk-return trade-off. By reducing the overall risk of the portfolio without necessarily sacrificing potential returns, investors can achieve better risk-adjusted returns over the long term.
  4. Capital Preservation: Non-correlated assets can play a crucial role in capital preservation. During market downturns or economic crises, these assets may hold their value better than correlated assets, providing a potential against significant losses and helping investors maintain their wealth.
  5. Opportunity to Profit from Market Inefficiencies: Non-correlated assets often move independently from the broader market due to differing market drivers. This can create opportunities for investors to profit from market inefficiencies and anomalies that might not be present in more traditional assets.
  6. Hedging Against Specific Risks: Some non-correlated assets, such as certain alternative investments or commodities, can provide effective hedging against specific risks like inflation, currency fluctuations, or geopolitical events. They can act as insurance policies that help protect the overall portfolio from these risks.
  7. Portfolio Customization: Including non-correlated assets allows investors to tailor their portfolios to their individual risk tolerance, investment goals, and market outlook. This customization can help investors achieve a more balanced and suitable asset allocation strategy.
  8. Reduced Dependency on Traditional Markets: Non-correlated assets can offer exposure to different markets, industries, and strategies that might not be well-represented in traditional equity and fixed-income investments. This reduces the portfolio's reliance on the performance of mainstream markets.
  9. Long-Term Stability: By incorporating assets with different risk factors and return drivers, investors can potentially a more stable portfolio that is better positioned to weather a variety of market conditions over the long term.

It's important to note that while including non-correlated assets has its benefits, it doesn't eliminate all investment risks. Some level of risk will always be present, and investors should carefully consider their risk tolerance, investment goals, and time horizon before making decisions about portfolio diversification and asset allocation. Additionally, the specific non-correlated assets chosen should align with the investor's overall strategy and objectives.

So what specifically are these assets and strategies?  Stay tuned here for a deeper discussion or contact me to stay ahead of the crowd.


-James