How to achieve risk-adjusted returns, enhanced diversification and decreased volatility in a world of low-interest rates

Alternative Investments. Once reserved for institutional mandates, this asset class continues to grow in popularity and is now making its way into the portfolios of sophisticated individual investors.

In this blog, we introduce you to the world of alternatives, the opportunities they bring, and the importance of following an appropriate due diligence process before jumping in.

Changing tack to stay on track

We are increasingly living in a low-interest rates world:

  • Volatility is trending higher.
  • Bonds, the standard counterpart to equities, have lost their lustre.

All of which is encouraging money managers to find alternatives. As a result, alternative investments are becoming more attractive to those searching for improved risk-adjusted returns, enhanced diversification and decreased volatility.

Not instead of, in addition to

Alternative investments still provide exposure to the three basic asset classes – equities, fixed income and real assets (commodities, real estate, and infrastructure, for example) – the same type of assets you most likely already hold in your investment portfolio.

Put another way, an alternative investment strategy does not necessarily replace what you’re comfortable doing but enhances it. It’s not instead of, but in addition to.

Though not exhaustive, here are some common alternative investment types:

  • Private equity.
  • Venture capital.
  • Private debt.
  • Hedge funds.
  • Real estate.
  • Commodities.

Once the alternative investment basket is built, it must be allocated strategically in the portfolio to act as a counterbalance with the other asset classes.

A new way of looking at wealth building

The key words are “strategy” and “counterbalance.” With alternative investments – just as with a more traditional investment approach – the key is to hold an appropriate basket of diversified assets consistent with your return expectation.

From the quality of the strategy to the consistency of performance, they offer an opportunity to go beyond traditional fixed income thinking into a new way of looking at wealth-building:

  • They can significantly increase the yield (return) on the portfolio while also increasing its diversification.
  • Their risk-return characteristics can be correlated with other assets in the portfolio, leading to lower volatility.

Most importantly, to be effective, they require an active strategy supported by appropriate due diligence.

At TWM Group, alternative investments have become a key pillar in our portfolios. In the video below, Nader Hamid explains why we invest in this asset class and describes our Investment Committee’s detailed process to select each position.

You can read more about Alternative Investments in Our Investment Process, and feel free to Get in touch if you have questions or comments.

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Our clients and their families typically have a net worth of $2M or more. If you have an amount under the minimum, we still invite you to get in touch to discuss your options.