The following offers an explanation behind increasing investor allocations into Alternative Investments.
The investment returns of many Alternative Investments result from the fundamental performance of the underlying business or project versus the more general swings of the equity and bond (Fixed Income) markets. Alternative Investments tend to offer Total Returns as well as Non-Correlated Returns based upon Issuer performance and are much less “market driven” (e.g. prevailing interest rates moving up and down in the bond markets or stock prices changing in the equity markets).
As such, many Investors, both institutional and individuals, who are looking to reduce their portfolios’ vulnerability to market movements they can’t control, have increased their allocations to Alternative Investments.
Public market volatility has increased
- Non-fundamental factors have had a dramatic impact on volatility and overall direction of public financial markets, such as:
- Information “immediacy” via the internet and mobile communication
- Hedge fund proliferation
- Algorithm-driven institutional trading
- High speed trading
- Global event impacts on domestic public markets
Uncorrelated or less-correlated returns
Some Alternative Investment strategies offer an uncorrelated (or much less correlated) substitute to major public market indices, whether equity or fixed-income, thereby offering a more immunized investment strategy.
Alternatives offer flexibility
- Current income or capital gains can be prioritized
- Tax efficiency
- Transaction structure
- Risk tolerance matching
- Industry selection