Introduction to Alternative Investments

There is a general lack of understanding regarding Alternative Investments. Simply put, Alternative Investments can be anything that is not a traditional investment (i.e. stocks/equities, bonds or cash). Alternative Investments encompass a wide range of investments that differ greatly in their composition and scope.

Alternative Investments are often divided into two categories:

1. Alternative Asset Classes, also called “hard assets” or “real assets” are generally tangible items (or securities backed by tangible items) that hold inherent value—that is, their value is not derived from traditional sources (i.e. the stock market). Examples of Alternative Asset Classes might include:
   • Managed Futures
   • First Trust Deeds
   • Capital Notes
   • Commodities (i.e. grains, gold, beef/cattle, oil/energy)
   • Oil and Gas Limited Partnerships
   • Currency
   • Real Estate
   • Life Settlement Trusts


2. Alternative Strategies are tactics or tools used to create value through investments in traditional and alternative asset classes. This allows the same asset class to be approached from a different angle designed to create additional value and lower overall portfolio risk. Examples of Alternative Strategies might include:
   • Options
   • Equity-based Lending
   • Arbitrage Strategies
   • Long/Short
   • PIPE Investing
   • Quantitative Trading
   • Global Macro
   • Hedge Strategies

Advantages of Alternative Investments

Alternative investments typically have low-correlation to traditional investments—that is, their movements are generally unrelated. This low correlation may help protect portfolios during sideways or down markets, and even potentially earn competitive returns despite a down turn.  Many studies have conclusively shown that the inclusion of alternative asset classes and strategies has historically lowered overall risk and simultaneously increased return*. While all investments contain risk, these studies illustrate how the judicious inclusion of alternative investments among traditional investments may produce a more predictable and less volatile experience for investors**.

As alternative investments are added to an investor’s portfolio, the correlation of the portfolio becomes lower, both internally (to the other holdings of the portfolio) and externally (to the general market and economy).  This is believed to be a key consideration in helping insulate your portfolio from unforeseen market conditions. While no investment or allocation is completely impervious to negative economic forces, the inclusion of suitable Alternative Investments into an investor’s portfolio, simply put, can potentially lower volatility, lessen drawdowns and increase risk-adjusted long-term returns.

* Lintner, John, “The Potential Role of Managed Commodity Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds,” Annual Conference of Financial Analysts Federation, May 1983. Northern Trust’s January 2007 report “Wealth in America 2007, Findings from a Survey of Millionaire Households”

** As with any investment, many facts must be considered when choosing alternative investments, including liquidity, track record, common and unique risks. Past performance is no guarantee of future results.