A lot of misunderstanding surrounds alternative investments. Some investors still think of them as high-risk, exotic funds reserved for ultra-high-net-worth individuals and sophisticated institutions, but the reality is that alternatives may have a place in nearly every investor's portfolio. Here we address ten common myths about alternative investing:
Myth: Alternative investments are their own unique asset class.
Reality: Alternatives represent different approaches to investing across a variety of markets and asset classes.
Myth: Only institutional investors and ultra-high-net-worth individuals can access alternative investments.
Reality: Individual investors have greater access to alternatives than ever before due to recent product innovations.
Myth: Alternative investments are more volatile than stocks and bonds.
Reality: When used as portfolio diversifiers, alternatives have the potential to reduce overall volatility.
Myth: Alternatives invest in derivatives, which in turn, increase their risk.
Reality: Derivatives are investment tools commonly used to manage or hedge out risks.
Myth: Investors do not have access to their capital if they invest in alternatives.
Reality: Liquidity levels vary among alternatives and are specific to each investment type.
Myth: Alternatives will always outperform stocks.
Reality: Just like traditional assets, alternatives are subject to inherent risks and will outperform (or underperform) at different periods in time.
Myth: It is easy to pick the right alternative - all I need to do is look at historical performance.
Reality: Investors need to consider a wide range of factors beyond performance when selecting which alternatives are best suited for them.
Myth: Investing in one type of hedge fund or private equity fund will diversify my portfolio.
Reality: Investing in only one type of alternative strategy may provide some diversification benefits, but can also concentrate risk exposures.
Myth: Alternatives failed to protect investors during the financial crisis.
Reality: In general, investors with exposure to alternatives fared better during the financial crisis than those with traditional portfolios.
Myth: Alternatives are too expensive.
Reality: Although fees for alternatives are typically higher than they are for traditional investments, the fees pay for broader access to investments and are intended to align manager and investor interests.