When the majority of people think about investing, they ideally plan to put their money in traditional investments like stocks or bonds. Right from index fund in one’s 401(k) or the cash in their savings account, such traditional investments are pretty common for most individual investors. However, there are a variety of investments beyond these traditional options. In the opinion of Scott Tominaga, the category of investing beyond traditional investments is referred to as alternative investments.
Scott Tominaga underlines a few benefits of alternative investments
Alternative investment is a type of financial asset that does not fall into the conventional investment categories. These investments can include commodities, and derivatives contracts, hedge funds, managed futures, private equity or venture capital, and more. Real estate is also often classified as an alternative investment. Alternative investments are a pretty dynamic asset class, and tend to cover an expansive range of investments with unique characteristics. A large number of alternatives are becoming increasingly accessible to both individual and retail investors today.
The majority of alternative investment assets tend to be held by accredited, high-net-worth individuals or institutional investors owing to the complex nature of these investments and the lack of regulation involved. While these assets may have relatively high initial minimums and upfront investment fees, their transaction costs are often lower than those of conventional assets owing to lower levels of turnover.
Here are some of the major benefits of alternative investments:
- Diversification: Alternative investments have an important role to play in the domain of diversification. They provide investors with a means to spread risk across distinctive types of assets. Investors would be in a better position to mitigate vulnerability to market fluctuations by including alternatives in a portfolio alongside traditional investments. They shall also be able to achieve a more balanced risk exposure.
- Enhanced returns: There are certain types of alternative investments that present the potential for greater returns in comparison to more conventional assets. These alternative investments especially imply to the ones in the realm of private equity or venture capital. The improved return potential presented by certain alternative investments tends to be attributed to the unique growth trajectories.
- Inflation hedge: Various types of tangible alternative assets like commodities and real estate typically serve as an effective hedge against inflation. When the value of such assets goes up with inflation, they may act as a safeguard, and preserve wealth in periods of increasing prices.
- Low correlation: Alternative investments usually exhibit a low correlation with traditional markets, which can be a huge benefit. This low correlation is an indication that the performance of alternative assets might not move in tandem with bonds or stocks. This makes alternative investment a valuable tool for constructing portfolios that can effectively withstand economic uncertainties and market volatility.
As per Scott Tominaga, risk management is vital to any investment strategy, and alternative investments offer unique ways to enhance it. For example, hedge funds employ various strategies like long-short equities and market-neutral approaches to help mitigate risk and deliver consistent returns. On the other hand, alternative assets such as commodities and real estate can act as safeguards against inflation or currency volatility, further strengthening and securing investment portfolios.