Alternative strategies, which can have low or no correlation to traditional markets, may also offer investors access to an expanded set of market opportunities. Simply put, investing in alternatives can help provide better portfolio diversification for those who can accept a potentially greater level of risk. During times of market stress, this is especially important.
Here’s how adding alternatives to a portfolio can create new opportunities:
1. Move in a different direction
It’s important to remember that there are different ways to engage with markets beyond the more traditional buying or selling of individual securities. For example, some alternative strategies employ techniques designed to profit when a stock price falls; others aim to offset the risk of unexpected price movements through “hedging”. These approaches can help buffer a portfolio when public markets are volatile.
2. Access new opportunities
Alternatives broaden the investable universe. When traditional investments seem lackluster and maybe even scary, alternatives can offer additional opportunities by tapping into specialized marketplaces beyond stocks, bonds and cash. This may include private markets, and other investments like commodities, real estate and infrastructure.
3. Understand the potential advantages of illiquidity
During times of market stress, alternative strategies that are not in daily-liquidity vehicles may be less likely to be forced to sell quickly and at a lower price than their more liquid counterparts like mutual funds, which may need to raise cash to meet redemption requests from investors. At the same time, they may be positioned to take advantage of attractive buying opportunities that are discounted because of market stress and dislocations. Plus, more illiquid assets often demand higher yields from investors due to the increased risks.
Is now the time to step into alternatives? Position for a post-crisis economy
While the ongoing COVID-19 crisis has already done its share to rattle markets and investor confidence, uncertainty for what’s yet to come may be as overwhelming. Now more than ever, investors need to consider all of their options when building a portfolio for their future. This may mean a number of things, including: boosting diversification, investing in new or different markets and taking advantage of unique opportunities caused by the current dislocations in areas like private credit.
Being prepared to weather a post-COVID environment by thinking offensively may be one of the most valuable strategies of all.
To learn more about alternatives, visit Understanding Alternative Investments