Alternative investments are commonly defined as investments other than stocks and bonds. These may include commodities, real estate, private equity, real assets, and investments with strategies such as arbitrage and hedging. The benefits of alternative investments include potentially higher returns and diversification resulting from low correlation with other more common asset classes.
Institutional investors, hedge funds, wealthy investors, and large endowments have used alternative investments as a way to boost returns and diversification for years. Historically, these investments have only been available to the wealthy. However, with the growth of mutual funds, the popularity of Exchange Traded Funds (ETFs), and Exchange Traded Notes (ETNs), many alternative investments and strategies are available to all investors.Many individual investors and their financial advisors fail to take advantage of alternative investments. This is due either to the lack of understanding or lack of knowledge that they are available.
Before using alternative investments, it is important for investors to understand the risk, tax consequences, and which alternative investments help properly diversify a portfolio. A good rule of thumb for investors is to not use an investment unless you understand the investment. Savvy Investors are starting to use alternative investments to compliment their portfolio. So ask yourself – what is my alternative?