Alternative Investment

Alternative Investment refer to those investment whose risk and return structures differ from the traditional asset classes such as equity and debt. They could be linked to the real economy more strongly than other financial instruments normally are.

The low correlation of returns of such investments with that of traditional investments enhances the diversification benefits in a portfolio in which these investments typically tend to have a higher risk and lower liquidity and do not trade like other assets. Investors have limited information available about them. They are therefore suitable as an investment option for investors willing to take greater volatility in returns, longer investment horizons and lower liquidity for better returns. Some of the alternative investments may require investing in physical assets.

Alternative investment are relatively illiquid and therefore it is difficult to determine the current market value of the assets. This also leads to limited historical data on performance and a low concentration of analysts tracking alternatives. Alternative asset classes tend not to move in lock-step with traditional assets classes that is they have low correlations to stocks and bonds. Notice in the picture how different asset classes perform in various phases of economic cycle.

Derivatives structured products, real estate, gold, commodities, private equity and art/collectibles are the most common alternative investments.

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