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What are alternatives?

Some investors still think of alternative investments as an exclusive, narrowly defined class of investments, but Alternatives come in a variety of packages, and can be a powerful tool that help investors achieve greater diversification, dampen volatility and boost returns.

What are alternative investments?

In general, there are two main types of alternatives. The first type are vehicles that invest in non-traditional assets, such as infrastructure, real estate and private equity. The second type involve investment strategies that invest in traditional assets using non-traditional methods, such as short-selling and leverage.

Traditional vs. alternative investments

What differentiates alternative investments from traditional investments?

Strategies constructed primarily utilizing public stocks and bonds. Characterized by:

  • High liquidity profile
  • Assets in public markets
  • High correlation to markets
  • Passive shareholders
  • Returns primarily driven by beta with lower dispersion among investors

Investments that look to exploit inefficiencies in markets by focusing on non-traditional assets and investment strategies. Characterized by:

  • Potential illiquidity
  • Assets in private and public markets
  • Low correlation to markets
  • Active shareholders (at times solo owners)
  • Returns primarily driven by alpha with higher dispersion among managers
  • Often focused on inefficient markets

Different types of alternatives

Alternatives are characterized in various ways.
Liquid Alternatives
Liquid Alternatives
Investments that aim to provide diversification and downside protection, available through more liquid vehicles such as mutual funds and ETFs
Hedge Funds
Hedge Funds
Strategies that focus on idiosyncratic risk to generate absolute returns irrespective of the market environment
Private Equity
Private Equity
Direct investments in private companies or buyouts of public companies, where managers look to add value through operations
Credit
Credit
Illiquid or non-core credit that offers a yield pickup over traditional investment grade credit due to illiquidity, credit worthiness or complexity
Real Assets
Real Assets
Physical assets that have value due to their substance and properties, such as real estate and infrastructure

By the Numbers

1981
BlackRock launched first Alternatives Fund

$135 Billion+
AUM in alternative assets under management by BlackRock

$7.7 Trillion
Alternatives are a $7.7tn industry1

$15.3 Trillion by 2020
The industry is expected to double in size by 20201