Are Alternative Investments Right For You?

Alternative investments can be a good opportunity for some investors to diversify their portfolios, even during times of market uncertainty. Watch this short video about what they are, and how we can help determine if they are right for you.

In this video we are going to provide a quick overview of Alternative Investments and the role they may play in a well-diversified investment portfolio.  What is an alternative investment?  Quite simply, an alternative investment is any investment other than stocks, bonds, and cash alternatives, OR mutual funds and ETFs that only hold stocks, bonds, and cash alternatives.  Some alternatives such as real estate, commodities, and hedge funds are available in a mutual fund or ETF structure, while others are only available in a private structure.  In either structure, the level of complexity ranges between simple and easy to understand, to complex and very difficult for the average investor to understand.

High net worth investors, and large institutional investors such as Pensions and Endowments typically allocate much higher percentages to alternatives as compared to individual investors.  The reason they do this is to potentially improve the risk-adjusted returns of their overall portfolio by adding asset classes with performance that is not directly tied to the performance of stocks and bonds.  At Aristata, we typically implement some alternative mutual funds or ETFs in our clients’ accounts where suitable in an effort to help lower volatility in their portfolios and smooth out the ride.

When compared to mutual fund or ETF structured alternatives, those offered in a PRIVATE structure attempt to provide HIGHER average returns, LOWER levels of volatility, AND additional tax advantages.  But those potential advantages come with tradeoffs.  First, to qualify investors must have a bare minimum of $1 Million of total investment assets, and for more exclusive alternatives, that minimum is much higher.  Second, these investments are more difficult to value, and values are usually updated monthly instead of daily.  And third, they are less liquid, and require a longer-term commitment.  The more exclusive the fund, the longer the commitment.  These private structure disadvantages mean they are usually only appropriate for more sophisticated investors with longer term investment objectives.

Now let’s look at an example of how this has worked.  As you can see in this chart provided by JP Morgan, a 30% allocation to alternatives from 1989 through the third quarter of 2022, increased the return while reducing the risk when compared to traditional stock and bond portfolios.  Let’s look at just one set of the data pertaining to the MODERATE portfolio.  HERE we find that the 30% allocation to alternatives increased the AVERAGE ANNUAL return from 8.16% to 8.87%, AND reduced the volatility or risk while doing so.

Again, as good as this may sound, alternative investments are not for everyone.  But, if you have an interest in learning more about PRIVATE real estate, equity, credit, and hedge fund strategies, or would like to know more about how WE utilize alternatives, please give us a call.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.  Aristata Financial  is not a registered broker/dealer and is independent of Raymond James Financial Services.

Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided. Investors should only invest in alternative investments if they do not require a liquid investment and can bear the risk of substantial losses.