The three main traditional asset classes to invest in have been stocks, bonds and cash. Recently, another asset class known as “alternative investments” has become more popular.
Although these AI’s have been around for a while, the use of AI’s has increased significantly to a record level of $6.5 trillion in 2011, growing seven times more than the traditional asset classes during the past five years. Large endowment funds such as Harvard and Yale (which have consistently delivered high double-digit returns with low risk) have up to 40 percent of their investments in AI’s!
The AI category is quite broad and includes “tangible” or “hard” assets such as real estate, commodities and currencies, and financial assets such as private equity, senior secured loans, hedge funds, managed futures and venture capital, among many others.
The main reasons many invest in AI’s are the lower correlation with traditional investments, reducing overall risk through diversification and providing more consistent returns. This means that the values of AI’s are generally unrelated from traditional investments and do not move in tandem with each other. In other words, if the market moves down, these AI’s in general may not fall as much as the market. Unfortunately, we have seen major market events affect every asset class, so investors are increasingly looking for other ways to diversify and reduce their risk.
Historically AI’s only have been available to large investors with smaller investors having no access to them. However, in the past several years more AI’s have become available to the general public, which provide the liquidity and low cost similar to traditional investments.
AI’s offer another line of investments that can expand and diversify sources of return in a portfolio. The persistent market volatility may be a good reason to look at AI’s to enhance a traditional portfolio. This can give more opportunities to generate higher returns while reducing overall risk in different market environments. A carefully constructed portfolio combined with traditional and alternative investments may be important as the global and U.S. economies become increasingly interdependent.
As always, be sure to check with a professional to see if investing in AI’s is right for you. It is important to have realistic expectations on any investment portfolio, and chances are if some investments seem too good to be true, they may be! AI’s may enhance your portfolio, but keep in mind: Like other investments, past performance is no guarantee of future results. Although there are no guarantees in the investing world, doing your homework and research with any investment can improve chances of meeting your investment and financial goals!