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Beyond Stocks and Bonds: Why Investors Are Investing In Alternative Assets

Posted on
24th April 2023
Author
By Harwin Ramos

Beyond Stocks and Bonds: Why Investors Are Investing In Alternative Assets

In the midst of the ongoing COVID-19 pandemic, investors are increasingly turning to alternative investments to diversify their portfolios and potentially earn higher returns. (By Harwin Ramos, 24th April 2023)

Alternative investments are consistently gaining popularity among investors, particularly in an uncertain economic environment. While most investors have relied on traditional assets such as equities, bonds, and index funds, the volatile economic environment has resulted in an increase in demand for alternative investment choices.

Alternative investments are simply those that do not fit into typical investment categories, such as equities and bonds. Alternatives include real estate, commodities, private credit, private equity, hedge funds, and other assets. One of the primary reasons investors are turning to alternative investments is their potential to provide diversification, critical for minimising overall risks in a portfolio.

As we approach the middle of the 2023 year, investors are seeking different investment opportunities to help diversify and decrease risk in their portfolios. With the post Covid-19 inflationary fallout driven higher rates creating worldwide economic slowdowns, traditional assets particularly equities and bonds have increased in volatility. In this article, we will look at why alternative investments are an ideal option for investors in 2023.

Diversification

The capacity of alternative investments to provide diversity is one of the key reasons investors are moving to them. According to CFA Institute research, diversification is the most effective approach to decreasing portfolio risk. Alternative assets, such as real estate, commodities, private credit, private equity, and hedge funds offer significant diversification and can assist balance across an investment portfolio.

Promising Returns

Even during the pandemic, alternative sectors including real estate and commodities offered potential positive returns. According to Preqin, the average return on real estate investments in Q1 2021 (in the midst of pandemic lockdowns) was 1.7%, compared to -0.4% for the S&P 500 index. Private equity has also outperformed public markets in recent years. Investors might potentially increase their profits by diversifying their portfolios with alternative assets.

Unique opportunities

Alternative investments can give investors access to unique investment possibilities that are not available through regular investing. Whilst alternatives can come with lower levels of liquidity, for the investor with a medium-term outlook, illiquidity premiums available in the returns of alternatives can be highly beneficial to investors. The ability to take exposure to assets that would normally be only available to large institutional investors is a great benefit in alternatives.

Hedge against inflation

Inflation can have a substantial negative influence on real investment returns. Inflation eroding the purchasing power of money, makes it critical that investors find measures to hedge against it. Alternative assets can act as a hedge against inflation. Some assets tend to perform better during inflationary periods, making them an excellent alternative for investors trying to preserve their returns.

Alternative investments may entail some risk, but with adequate research and due diligence, investors can make informed selections that can result in significant profits. According to a recent study conducted by UBS, 57% of those polled are contemplating expanding their allocation to alternative assets.

To summarize, the unpredictable economic environment in 2023 with economic growth slowing and rates higher, makes alternative investments an appealing option for investors wishing to diversify their portfolios.  Alternatives provide access to new investment possibilities. As with any investment, thorough study and due diligence are essential for making educated decisions that can result in significant profits.

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