Investing in alternative assets can be a great way to diversify investor portfolios, but all investments seeking stronger returns than simply staying in cash do come with risks. To ensure safe investing, it is important to do your research and clearly understand the risks of the asset in order to form a sound view of whether the returns exceed the potential risks.

Here are six key steps when investing in alternatives:

When investing in alternative assets, there are key steps to ensuring safe and successful investments.

1. Firstly, it is essential to understand the nature of the asset and how it may react to different market conditions.  This has to be a starting point for initial research work.  Research must include understanding the assets' primary and secondary risks, the people managing the asset and how susceptible financials are to change.
2. Secondly, it is important to analyse the asset's performance in the past  – particularly in terms of how the risk profile has changed over time and through different economic cycles.  This will help form a view of how the asset will likely perform in the future.
3. Thirdly, it is important to consider the liquidity or particularly illiquidity of the asset.  How easily could it be converted into cash if it were needed? If the asset is totally illiquid until a particular time, is there enough premium built into the return profile to pay me as an investor for a lack of liquidity?
4. Fourthly, it is important to consider the costs and transaction fees associated with acquiring the asset.  Acquiring high-quality assets often does come with a cost, it’s fair to say you generally get nothing of high quality for free.  So ensuring the fees and costs are kept within reason for the type of asset being acquired.
5. It is then important to consider if the investment is suitable for the investor’s own risk tolerance and financial goals.  A self-directed investor will make this decision on their own views, whilst an advised investor will rely on the services of their advisor to determine suitability.
6. And finally diversify, monitor and rebalance.  Diversifying investments reduces overall portfolio risks and helps protect against volatility. Investing across multiple alternative asset classes, such as varied private credits, asset-backed, real estate-backed, and private equity deals can help spread portfolio risks and achieve greater balance across overall portfolios.

Following these steps will help ensure safe and successful investing in alternative assets.