4 Reasons Portfolios Can Benefit from Alternatives

Feb. 5, 2024

Stocks and bonds have been the leaders of investment assets. While they still have their roles in portfolios, alternative investments, or alts, are making a name for themselves in this era of investing.

Alternative investments represent an ‘alternative’ way for investors to diversify their investment portfolios away from their long-standing reliance solely on traditional asset classes.

Historically, alts were used by institutional investors seeking diversification, more reliable income streams, and higher return potential. More recently, improvements in transparency, reporting, and accessibility have expanded the audience for alternative investments to also include qualified high-net-worth individuals.

Overall, alternatives have their place in the modern investment landscape as qualified investors look to include them in their portfolios. The future is optimistic with new investment vehicles and product innovation paving the way for alternatives to be a mainstay in portfolios for decades to come. Here’s what you should know.

Why Investors Should Consider Alternative Investments

When assessing their characteristics, alternative investment strategies can vary significantly by underlying asset type, target return, liquidity profile, and volatility but generally seek to offer four potential benefits to a portfolio:

  1. Diversification
    Alternative investments seek sources of return that may be less correlated to traditional asset classes, which may help to minimize risk and offset exposure in more volatile or down markets. The classic 60/40 portfolio still has its place, but in some cases, incorporating alternative asset classes – like hedge funds, private equity, private credit, real estate, and infrastructure – can result in better risk-adjusted returns.
  2. Current Income
    Certain alternative asset classes and strategies may provide investors with differentiated and supplemental sources of yield compared to traditional fixed income or dividend-paying stocks.
  3. Capital Preservation
    Some alternative asset classes and strategies may target principal or inflation protection to help reduce portfolio volatility.
  4. Enhanced Returns
    Alternative investments may offer differentiated and higher return potential compared to traditional asset classes.

…And Weigh the Risks

As with all investments, investors need to consider the risks that accompany their strategy. For alternatives, five areas of caution are: alts may not offer the same level of transparency you get from traditional investments; there can be liquidity concerns as alts typically have a lockup of capital, leaving your investment untouchable for an extended period; fees are generally higher than traditional strategies; strategies may use leverage which can impact risk and return; and the degree of concentration can vary widely, impacting volatility.

At the end of the day, the right investment strategies and vehicles for your portfolio are dependent on goals and risk tolerance. What works for one, won’t always work for another. Yet, it never hurts to keep the potential for alternative investments in your back pocket, and while you do here’s a quick comparison to keep in mind.

Alternative Investments

Traditional Investments

Absolute performance objective Relative performance objective
Performance dependent primarily on alternative investment manager’s skill Performance often dependent on market returns
May use leverage Limited or no leverage
Historically low to moderate correlation with public market indices Historically high correlation with public market indices
Typically, have reduced liquidity ranging from monthly to 12+ year lock-ups Typically offers daily liquidity
Generally higher fees, which may include performance fees No performance fees but may include fixed management fees for professional management
Usually, higher investment minimums Generally low investment amounts allowed
Less regulated Highly regulated
Only open to accredited investors and qualified purchasers Open to general public and accredited investors

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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