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An alternative investment is defined as any type of investment that is out of the frame of traditional investment. The traditional investment includes the following three types of investment: stock, bond and cash, whereas alternative investment includes real estate, hedge funds, commodities, financial derivatives and private equity. Alternative investments have become quite popular in the last years and this is due to the particular benefits alternative investments can bring to a portfolio.
As it was already mentioned above, alternative investment has gained much popularity among investor in the last few years. This is the result of the number of advantages it offers to investors. Now let us see list the main advantages of alternative investment.
There is a quite popular belief that hedge funds and private equity funds are considered to be very risky investments. Of course, this point of view may be right, only when these funds are viewed as an independent investment. Nevertheless, in the context of total portfolio, these investments appear to have great diversification benefits. Actually the returns of alternative investments show lower correlation with traditional investments, such as stocks and bonds, and this is the main reason why investors should add alternative investments to a portfolio, as in that way they can reduce volatility and make more profit.
It goes without saying that some alternative investments are a very good inflation hedge, since their returns are not highly correlated with inflation. Actually, assets which are used to hedge against inflation are negatively correlated with stocks and bonds. Commodities are considered to be a good inflation hedge, because in case of high inflation, stocks and bonds tend to decline, while commodities tend to outperform.
Alternative investments have the potential of offering investors high returns. However, as with traditional investments, the returns on alternative investments also vary over time depending upon various factors.
New exposures and opportunities
With alternative investments, which are so varied, investors have many possibilities to find various new exposures that are not correlated with traditional investments. Besides investing in stocks and bonds, investors can also invest in commodities, real estate, private equity etc.