The Role Of Alternative Investments In A Modern Wealth Portfolio

The two most common ways to invest are bonds and stocks. However, did you know that alternative investments are also a useful tool for diversifying your investment portfolio and securing long-term wealth?

Once, these were only common and exclusively used by institutional investors. But now it is becoming more common for high-net-worth individuals and private investors.

They are using alternative investments to protect their assets against inflation, diversification, and as a new source of return.

Investors are facing economic uncertainty and market volatility, and that is why they are looking for ways that they have not tried before.

In this article, we’ll take a look at the evolving role of alternative investments, as well as the benefits, risks, and how to integrate them into a wealth strategy that aligns with your financial goals.

What Are Alternative Investments?

These are the assets that fall outside the conventional world of equities, bonds, and cash. These investments have unique return characteristics and behave in a different way from traditional assets, which makes them valuable to the portfolio.

Common types of alternative investments are:

• Private equity: Investing in private companies directly that have growth potential beyond public markets.
• Hedge funds: Pooled investments use advanced strategies to get returns in different market conditions.
• Real estate: These are tangible assets that generate income over time.
• Commodities: These are physical goods like gold, oil, and agricultural products that can be used as a hedge against inflation.
• Infrastructure: Investments in essential public assets like transport, utilities, and renewable energy.

These assets tend to be less liquid and often more complex, but they offer opportunities that may not exist in traditional markets.

Why Include Alternative Investments In Your Portfolio?

There are three key reasons to include alternative investments in your portfolio:

1. Diversification Benefits

Alternative investments do not have much connection with the traditional markets. This means that when equities are not performing well, alternatives like commodities or property may hold their value or rise, and reduce the volatility of the entire portfolio.

2. Potential For Higher Returns

Hedge funds and private equity have delivered competitive returns in the long term. For instance, a study from 2015 found that private equity returns are more than public markets by an average of 3 to 4% every year.

3. Hedge Against Inflation

Real assets like property, commodities, and infrastructure generally have purchasing power during times of inflation. For investors who are concerned about the prices going up, they can go with the alternatives. They provide necessary protection.

Understanding Risks And Rewards

While the advantages are definitely intriguing, it’s important to understand the risks involved in alternative investing.

Common risks to be aware of include

• Liquidity risk: There are alternatives that cannot be traded easily and might even have lock-in periods.
• Complexity and transparency: Structures are often opaque and need expert analysis and deep understanding.
• Regulatory risk: There are some alternatives that face limited regulation and have high exposure.

Balancing Risk With Reward

If you think strategically before taking an approach, you can manage the risks of alternative investments. Experts can help you understand suitability and conduct due diligence.

Moreover, they will help you build a well-structured alternative allocation in your portfolio to ensure that you diversify your assets in a way that will align with your goals.

Tailoring Alternative Investment Solutions To Your Financial Goals

Every investor’s situation is unique. There’s no such thing as a one-size-fits-all approach when it comes to alternative investments. That’s why personalised financial planning is essential before diving into the alternative investment universe.

An experienced financial adviser will align alternative investment solutions with your long-term objectives, time horizon and risk tolerance. For high-net-worth individuals, bespoke strategies might include:

• Co-investments in private deals
• Access to curated hedge funds
• Global real estate or infrastructure projects
• Tax-efficient offshore structures

These opportunities are often inaccessible to the general public and require tailored advice to unlock their full value.

Getting Started with Alternative Investments

Alternative investments can be a lucrative way to diversify your portfolio and secure your financial future. Are you interested in diversifying with alternatives, but not sure what to do first? Here’s how to begin:

1. Evaluate Your Investment Goals

Define your risk profile, liquidity needs and income targets.

2. Consult With An Experienced Adviser

A professional can help identify suitable opportunities and structure your portfolio accordingly.

3. Conduct Due Diligence

Scrutinize the fund’s performance history, fees, strategy and management.

4. Start Small And Scale Up

Begin with a modest allocation and expand as your comfort and understanding grow.

Frequently Asked Questions

Here are some of the commonly asked questions about alternative investments.

Might Not Be An Alternative Anymore

Alternative investments have become a normal part of investing. Very soon, they might not be considered as alternatives. For many, these are an important part of a wealth portfolio. They offer growth, protection, and diversification in a way traditional assets can’t.
However, it’s often that successful implementation boils down to customization and guidance. By working with a trusted partner like MHG Wealth, you can explore alternative investment solutions that align with your unique financial vision.