What are Alternative Investments?
We can separate alternative investments into two distinct categories
Alternative assets
Alternative assets include real estate, infrastructure and private equity. Unlike traditional assets – stocks and bonds – these investments are not traded on public markets.
Alternative strategies
Alternative investment strategies may invest in traditional stocks and bonds, but they use non-traditional strategies, such as those used by hedge funds.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Traditional vs. Alternative Investments
What are the differences between alternative and traditional investments?
Risk. The Strategy’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Strategy may not be able to realise the investment at the latest market price or at a price considered fair.
What are the different types of alternative investments?
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Liquid Alternatives
The first thing to note about the range of investments on offer here is that they are liquid alternatives. Unlike private equity, for example, investors can access these strategies via more liquid investment vehicles, such as mutual funds, UCITS (undertakings for investment in transferable securitiesand Cayman (also a collective investment scheme, but one that is domiciled offshore), and exchange-traded funds (ETFs), which are funds that are traded on stock exchanges. And they usually invest in traditional assets, such as stocks, bonds and cash.
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Non-traditional strategies that can invest in traditional assets are usually known as hedge funds. Hedge funds use their less-regulated nature to generate very different investment opportunities to those of traditional equity and bond funds.
Rather than just investing in securities they think will make positive returns, hedge fund managers exploit inefficiencies in markets to make returns. In the long term, this can provide you with diversification, and in the short term, you can take advantage of opportunities across market cycles and asset classes as they present themselves.
Risk. Diversification and asset allocation may not fully protect you from market risk.
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Long/short strategies involve buying stocks (going long) that are expected to perform well and selling stocks (going short) that are expected to perform poorly. Shorting involves “borrowing” a stock that is projected to decline in value, selling it and then buying it back for a lower amount.
Risk. The Fund may short sell securities to profit from a decline in their price. This creates the risk of an unlimited loss, as the price of the underlying security could theoretically increase without limit, increasing the cost of buying those securities to cover the short position.
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Stocks are often mispriced following a corporate event, usually a restructuring, merger or takeover. Event driven strategies aim to take advantage of this mispricing in order to make a profit.
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Relative value strategies seek to exploit temporary differences in the prices of related securities (e.g. two companies in the same industry).
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Global macro strategies aim to profit from price changes caused by economic events. They often involve using long and short positions when determining the winners and losers, and use a range of securities, including stocks, bonds and currencies.
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Our global multi-asset, long/short Style Advantage franchise seeks attractive, diversified risk-adjusted returns with a low correlation to major equity and bond markets.
Risk. There can be no guarantee that the investment strategy can be successful, and the value of investments may go down as well as up.
Illiquid Alternatives
Alternative assets can be split into real assets, private equity and private credit, all of which are traded privately and less frequently than publicly traded stocks and bonds. This makes them illiquid, meaning it’s harder to withdraw your money and more difficult to see how your investments are performing. So, why do people invest in alternative assets?
Because the potential returns can be higher. Due to the difficulties in selling and valuing illiquid investments, many investors expect a risk premium, which may make alternative assets more profitable. While some investors avoid illiquid investments at all costs, others specifically seek them out in order to earn this risk premium.
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Real assets are investments that involve direct ownership of non-financial assets, including infrastructure and real estate. While real estate focuses on land and permanent fixtures, such as buildings, infrastructure centres on the income made via real assets that are usually held by the public sector – toll roads, ports and airports, for example. Commodities and natural resources are also considered real assets.
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Private equity is investing in the equity and debt of companies that aren’t traded on public exchanges. When you invest with a private equity manager, they will look to add value to the businesses in their portfolio in order to make a higher return when the company is sold.
Private equity investments can take on a number of forms, including the following:
- Venture capital – funding new business ventures
- Leveraged buyouts – using debt to buy a stake in an existing business
- Mezzanine financing – a mixture of debt and equity financing, with the option to convert the debt to equity if the company runs into trouble
- Distressed debt – investing in the debt of private companies that are in financial distress
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Private credit is privately issued debt that may offer diversification and a higher yield compared to publicly traded debt. This is due to the greater risk, illiquidity and complexity involved in private credit investing.
Risk. Diversification and asset allocation may not fully protect you from market risk.
We believe true partnership is the path to outperformance
Our dedicated BlackRock Alternative specialists’ partner with BlackRock’s multidisciplinary teams and draw on our global resources in an effort to deliver consistent long-term returns.
Source: BlackRock, as of March 2020. All dollar figures are in US dollars. Number of professionals excludes contingent workers and interns. Client assets include committed capital. Client assets include currencies and commodities. Alternative credit is reported in BlackRock Alternatives. Leveraged finance is not included in the alternative client assets figure.
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We are building Tomorrow’s Alternative Platform to help evolve the industry and to continue to deliver on our promise to clients: Outperformance with true partnership. We offer a range of solutions in: real estate, infrastructure, private equity, credit, hedge funds and alternative solutions.
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