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What are alternative investments?

Broadly speaking, alternatives are investments in assets other than stocks, bonds and cash, or investments using strategies that go beyond traditional methods, such as long/short or arbitrage strategies.

Since alternatives tend to behave differently than typical stock and bond investments, adding them to a portfolio may provide broader diversification, reduce risk and enhance returns.

Are alternative investments good?

Alternative investments are useful investment strategies for investors looking to diversify their portfolios from traditional funds. If that sounds like you, consider including some of these popular alternative investments in your portfolio:

Hedge funds

With their range of trading strategies and participation in non-traditional markets, hedge funds can provide a level of diversification to a portfolio that can be hard to find elsewhere. Some distinguishing features of hedge funds are:

  • They offer a broad opportunity set and fewer restrictions on investments, and can include investments that are less correlated. This means an investor may be less impacted by market extremes or volatility.
  • They employ trading strategies that seek out market inefficiencies, allowing highly skilled managers to add significant value over time.
  • They are grouped in five categories: Long/Short Positions, Managed Futures, Global Macro, Distressed and Multi-Strategy.

Private equity

Investing in private companies offers the potential for enhanced diversification and returns, since the factors driving these markets differ from those that drive public equity markets. Benefits of private equity investing can include:

  • Private ownership enables long-term strategic focus, versus the public market focus on quarterly earnings.
  • Overall, returns on private equity investments have exhibited attractive performance on both a risk-adjusted and an absolute basis.
  • Private equity investments provide a spectrum of opportunity by spanning all stages of a company’s life cycle, including during venture capital, growth periods, buyout and restructuring. Learn more about private equity alternative investments.

Commodities

Historically, investment in commodities such as natural resources — including agricultural products, energy, precious metals and industrial metals — comes with several benefits. Benefits of commodity investing can include:

  • Commodities rise and fall with supply and demand. The more a commodity is in demand like oil or natural gas, the higher price, and profit for the investor, will be.
  • Commodities protect against inflation. They are not sensitive to public equity market movements, so they are a natural protection from risk in that arena.

The most popular types of commodity investments include:

  • Index funds: These funds track an index that includes various commodity assets.
  • Commodity funds: Known as "true" commodity funds, these funds invest directly in the underlying commodity asset. An example would be a commodity fund that holds a direct position in gold and oil.
  • Futures-based commodity funds: These funds offer exposure to commodities by investing in futures contracts without ever buying the actual underlying commodity assets. This type of investment may carry higher risk due to the volatile nature of the futures contracts market.

Learn more about commodities and explore BlackRock’s range of commodity funds.

Real estate

Real estate is another popular and flexible investment strategy for portfolio diversification. Contrary to popular belief, real estate investing is not just for wealthy investors. Publicly traded exchange traded funds (ETFs) and trusts allow investors low barriers for real estate investing strategies. Benefits of real estate investing can include:

  • Real estate can be a good source of diversification, because it is less correlated to stock, bond and cash returns over the long term.
  • Real estate is a strong generator of immediate cash flow and offers the potential for capital gains.
  • Real estate investment trusts (REITs) combine the potential of real estate's increasing value over time with the transparency and liquidity associated with publicly traded stocks. This type of investment may carry higher risk. Learn more about REITs and other real estate investments.

How do alternative investments work?

Alternative investments are often met with misunderstanding. Some investors still think of alternatives as high-risk, exotic funds reserved for ultra-high-net-worth individuals and institutions. The reality is that alternative investments can be an integral part of nearly every investor’s portfolio.

  • Myth: Alternative investments are more volatile than stocks and bonds.

    Reality: While some alternative investments can experience higher levels of volatility than traditional stocks and bonds, as a group, alternatives are no more volatile than any other investment. In fact, many alternatives experience far less volatility than the stock market.

  • Myth: Alternative investments are a unique asset class.

    Reality: Alternatives represent different approaches to investing across a variety of markets and asset classes. A useful way to think about alternatives is to differentiate between their “contents” – the assets or strategies that determine how individual investments might be expected to perform – and their “containers,” the fund structure that will determine transparency and access to capital.

  • Myth: Investing in one alternative fund will diversify my portfolio.

    Reality: Just as adding one stock or mutual fund does not lead to significant diversification, a single alternative investment may similarly have limited impact. Investing in only one alternative strategy may provide some diversification benefits, but can also concentrate risks.

  • Myth: Investors cannot access their money if they invest in alternatives.

    Reality: The liquidity of alternative investments depends on the individual investment. Some alternative mutual funds provide daily access to cash. Limited partnerships, on the other hand, can have restrictions from 30 days to longer than 10 years.

  • Myth: Only institutional and ultra-high-net-worth investors can access alternatives.

    Individual investors have greater access to alternatives than ever before due to innovations in product structures. Open-end mutual funds, for example, have either noorlow barriers to investing. Other structures, such as registered closed-end funds and unregistered funds, have some limits on who can access them.

  • Myth: Alternatives have failed to protect investors during market downturns.

    Reality: It's true that correlations across nearly all investments tend to converge under periods of extreme market stress. Even during crises, however, history shows that alternatives typically have not fallen as far as stocks, providing a cushion for investors.

  • Myth: Alternatives are too expensive.

    Reality: The fees for alternative investments vary and depend on the fund’s structure. An alternative investment’s “container” usually indicates the fees an investor can expect to pay. Partnerships typically entail management and performance fees. Mutual funds, on the other hand, charge a management fee but do not charge a performance fee.

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What are frequently asked questions about alternative investments?

Why should I consider alternative investments?

When screened for correlation to other parts of a portfolio, alternative investments may help lower volatility, enhance returns and broaden diversification.

Are alternative investments liquid?

The liquidity of alternative investments depends on the individual investment. Some alternative mutual funds provide daily access to cash. Limited partnerships, on the other hand, can have restrictions from 30 days to longer than 10 years.

How can I use alternative investments?

Investors should choose alternatives that align with their distinctive goals, which may include: mitigating stock market volatility, lowering correlation to traditional markets, investing capital for a longer time frame in exchange for higher return potential, and hedging a portfolio against inflation or rising interest rates.

What are the most popular alternative investments?

There are eight common types of alternative investments:

  1. Hedge funds
  2. Private equity
  3. Commodities
  4. Real assets
  5. Direct investments in start-ups and private companies
  6. Venture capital
  7. Fund of funds
  8. Private placement debt