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Breaking Down Alternative Investments

An alternative investment is an asset that is not of conventional investment types, such as stocks, bonds or cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and regulations of the investments. Alternative investments can include private equity, private debt, hedge funds, real estate, commodities, precious metals and capital markets offerings.

While some alternative investments have barriers to entry like higher minimums or lower liquidity, the low correlation to standard asset classes makes them an instrument for portfolio diversification. Additional diversification benefits can include hedging against inflation, interest rate volatility, and market risk.

 

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As illustrated in the chart above, the addition of alternatives to a portfolio can improve returns over a traditional portfolio for any given risk level.

Like any investment, proper due diligence as to the suitability of inclusion in your portfolio is essential. Independent third party research by Mercer on a variety of alternative investments and strategies is available in this Primer.