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Portfolio With Alternative Investments

Features Of Alternative Investments

Most alternative investment products have the following features:

1. Lower liquidity

Compared to traditional investment, alternative investments have relatively lower equity. This is mainly because they don’t trade in a centralized market and have lower demand than traditional investments. Moreover, many of them may be close-ended and hence may have exit restrictions. Hence, liquidating an alternative investment and cashing out a position may be difficult at times. 

 

2. Higher purchasing costs

Since you have seen the types of products, you must have realized that almost all of them are expensive. Hence, purchasing an alternative investment can entail a higher cost. Additionally, in some cases, a cost may be involved during the purchase, such as a fund management cost, which has to be paid by the investor. 

 

3. Lower correlation with traditional investments

Alternative investments generally have little or no correlation to traditional investments. And this is what makes it a good choice for any portfolio. Consider a situation such as 2020, when global markets crashed due to the Covid-19 pandemic. Naturally, the value of all portfolios went down. However, those portfolios which had some amount of alternative investment did not suffer as much. 

 

4. Determining the underlying value may be difficult

As mentioned earlier, the world of alternative investments is vast. Some products may be so complicated that determining the underlying value may be difficult. For example, a piece of antique furniture may be valuable due to its design, craftsmanship and age. However, different people will have different opinions about exactly how much it is worth. 

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Units 3/10