Overview

  • Investors should consider both the "contents" (underlying investments) and the "container" (legal structure) when evaluating alternative investments.
  • Innovations in alternative investments are making them more accessible and easier for investors to use.
  • A portfolio should hold a variety of "contents" as well as "containers" to reap the benefits.

Many people think of investments such as hedge fund and private equity as stand-alone asset classes that have little to do with more traditional asset classes such as stocks or bonds. However, alternatives actually represent different approaches to investing across a variety of markets, assets and strategies.

A useful way to think about alternative investments is to differentiate between "contents" and "containers." Contents can be either the assets themselves or the investment strategy employed. Currency and real estate, for example, are truly alternative assets in that they have little relation to the performance of traditional stock or bond investments. Alternative strategies often trade in the same markets as traditional investments but take a unique approach — long/short or arbitrage strategies, for instance. Either way, these "contents" (as a product of their mix of underlying risk factors) determine how the investments are expected to perform relative to traditional asset classes.

Containers are the types of vehicles in which these investments might be found, such as hedge funds, private equity funds and mutual funds, all of which are structured differently for a variety of management, liquidity, legal and regulatory reasons. These vehicles may include similar investments but can encompass varying styles and methods of investing across different markets. Hedge funds, for example, are categorized together because their goal is to mitigate (i.e.,"hedge out") certain risks that are inherent in traditional asset classes, and their focus is on producing returns that are less correlated with the equity and fixed income markets — not because their "contents" are all the same.

Accessing Alternative Investments: Contents Vs. Containers


Thinking in terms of contents and containers can help you diversify your portfolio not only by investment type, but by investment vehicle. Through the various contents, you can diversify the forms of risk in your portfolio and gain exposure to different areas of the market. Meanwhile, the different "containers" can be a useful way to think about investing for different needs (e.g., liquidity needs, transparency needs, ease of access, etc.).

Understanding the Range of Investment Choices

Due to a number of product innovations, alternative investments today come in a variety of packages, span a range of strategies and are available to nearly all investors. Adding alternative investments to a traditional portfolio has the potential to enhance returns, while also reducing risk, because they don't typically move in tandem with other parts of a portfolio. The information below is designed to help you weigh some important factors when selecting individual investments.

Open-End Mutual Funds Registered Closed-End/Private Funds Unregistered Private Funds
Accessibility (Investor Qualifications) No/low barriers to investing Typically requires the investor to be an "Accredited Investor"(Has $1 million or more in net worth and/or a pre-specified annual income) Usually requires the investor to be a "Qualified Purchaser" (Has $5 million or more in investable assets)
Investment Universe More constrained by regulatory restrictions Broader opportunity set Largest opportunity set
Transparency High Moderate to high Typically limited
Minimums Low (Typically starting at $1000) Moderate (Typically $10,000 - $50,000) High (Typically $100,000 or more)
Valuations Daily Periodic
(Typically monthly or quarterly)
Periodic
(Typically monthly or quarterly, may be based partly on estimated value of illiquid securities)
Fees Management fee + other expenses Management fee + other expenses: may be distribution and/or performance fees Management fee + other expenses: likely to be distribution and performance fees
Constraints Around Leverage/Shorting High regulatory constraints Moderate/ some regulatory constraints Typically unconstrained
Typical Fund Structure Registered Investment Company Registered Investment Company or Limited Partnership Limited Partnership
Tax Reporting Form 1099 Form 1099 or Schedule K-1 (varies by product) Schedule K-1

The information on this website is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Incorporating alternative investments into a portfolio presents the opportunity for significant losses. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors.

Investing in alternative strategies such as a long/short strategy, presents the opportunity for significant losses. There is also the possibility that long and short strategies could both fail, thereby increasing volatility and potential losses.

Hedge funds may not be suitable for all investors and often engage in speculative investment practices which increase investment risk; are highly illiquid; are not required to provide periodic prices or valuation; may not be subject to the same regulatory requirements as mutual funds; and often employ complex tax structures.

Utilizing private equity involves significant risks along with the opportunity for substantial losses.

Diversification and asset allocation may not protect against market risk or loss principal.

Please consider the investment objectives, risks, charges and expenses of each fund carefully before investing. The funds prospectuses and, if available, the summary prospectuses contain this and other information about the funds and are available, along with information on other BlackRock funds, by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

Prepared by BlackRock Investments, LLC, member FINRA

* Not FDIC Insured * No Bank Guarantee * May Lose Value

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